Tuesday, May 22 , 2018, 3:28 am | Mostly Cloudy 51º

 
 
 

Ken Partch: Trail Braking Keeps You Steady When You Hit Life’s Corners

When I raced vintage Formula 2 cars in the late 1990s, there was a driving technique that, once mastered, could help you enter a corner at a higher rate of speed, or avoid an accident if the driver had entered the corner at a speed exceeding the vehicle or the driver’s capabilities. It was a technique known as “trail braking” and it is analogous to what I am doing for my clients at this point in time. By applying the brakes ever so slightly in a high-speed turn (which seems counterintuitive), the car would actually settle down, allowing you to carry more speed through the corner and ultimately lowering your lap times.

You could say that in this column I will be attempting to have you consider the possibility that while investing is an option for each of us — not a clear mandate — being an investor does not imply that you are 100 percent sure of anything. But I think you have to be positive about the realities and not get sidetracked by rhetoric, no matter how convincing. These days I would suggest investors are in juxtaposition. I would suggest that they are experiencing one thing in their own world (perhaps not so great) and at the same time perceiving — maybe even believing — that in the “real world” things are actually not so bad.

There are a few things that support my thesis that we live in a world that seems to require a sequential and intuitive approach when, in reality, a counterintuitive approach pays a bigger reward. For instance, just last week, the Federal Reserve said it believes deflation is a larger concern than inflation. The concept seems totally paradoxical given that interest rates have been abnormally low — lower than at any point in history and cannot go lower — yet at the exact same time raising rates, in reality, could actually stimulate more growth.

With corporations sitting on nearly $2 trillion in cash, a multidecade high, one current mentality is that if interest rates were to rise it would finally give the green light to corporations to further invest in technology, which would then make things more efficient, driving up productivity, and at the same time lowering inflation. Deflation could be cured today and eventually inflation battened down in the future. Food inflation, yes. Overall inflation, not so much. Thank technology for that.

Seems intuitive but still confusing, I am sure. Let’s agree for the sake of argument that the idea here is still a very fluid concept. One can’t deny that virtually everyone you can find on Wall Street these days is gunning for the U.S. stock market to keep going up. That is the consensus, but it is not the rule. Some very smart people believe differently. The following is a starling reminder that opinions sway public opinion as much as the facts and coincidences often do present themselves.

After 45 years, Harry Schultz, the famed international publisher of a popular investment newsletter, has decided to call it quits. He indisputably predicted the crash of 2008, and while seen as very controversial in some circles, his predictions on a wide range of subjects have nevertheless been quite accurate. Shultz, on the eve of his last column, writes: “Roughly speaking, we’re in the biggest worst mess since the 17th-century financial collapse. I believe that the absence of political will of the U.S. government and its leadership we will hatch problems and promote rot that will go very deep over the next several years.” His parting shot was “Good luck to us all.”

What do we believe? Here is a noted expert whose record you can’t deny. Yet there are some real life events that some might wish to argue are just coincidences. Or are they?

I think it is in what you actually see and what you necessarily start searching for. Here is a short example: I walk the beach frequently, searching for sea glass. One day, I found a heart-shaped rock, and another and another. Was it a coincidence? Or was it that after the first heart-shaped rock — which is always better than one piece of sea glass — I began to focus on a rock that was of value to me?

Let me introduce what I call the “Three Charms.”

The first of these charms being the fact that President Barack Obama is entering the third year of his presidency. The second charm is that this March marks the beginning of the third year in the latest Bull Run. And if coincidence wasn’t enough, it should also be noted that this is the third year that the U.S. economy will have been in a period of recovery. Individually, each of these charms probably wouldn’t be enough to augur enough support for a real bull case, but collectively they are forces to be reckoned with. Time will tell.

This combination of the presidential cycle along with this being the third year of a business expansion is quite bullish, and moreover bull markets tend to run in herds of four — four years, that is. There you have it, “Three Charms.”

Unfortunately, many investors invest these days like my grandmother drove — either totally on the gas or totally on the brake. And very much like the way my grandmother used to drive, some investors have come to believe they have to be all bearish or either all bullish.

What scenario do you believe?

Throw caution to the wind, maybe ignore the road signs and “go all in,” swayed by the pundits and believing that the world is coming to an end and that everyone needs gold, some beans, and a Patagonia jacket, a Jeep Cherokee, a gun and a house in Boise.

Allow me to tell you a little story because it’s the antidote for over-enthusiasm or over-negativism, as I call it. It’s the story of temperance, and the most practical of application in the most sincere and genuine way. I used to go to Trinity Baptist Church about 20 years ago. The pastor at the church was a guy named Jerry Root. He used to tell a story about how he taught the meaning of “temperance” to his children. Each night he’d bring home a paper clip or a piece of butterscotch candy — something he picked up during the day. He sat his kids down nightly and said, “Hey, kids, I will give you what I’ve got in my pocket — a piece of hard candy, a paper clip, a piece of paper. But if you’re willing to wait until tomorrow, I’ll take you to the toy store and buy you a $10 toy.” At first he did not have any takers; they wanted the butterscotch candy. Weeks passed and I am sure he questioned his “teach point.” I only assume he did, though. Finally, one of his children said, “I’ll take the toy.”

Remember, temperance means “while in the jaws of pleasure, the act of denying oneself the current pleasure for a greater long-term benefit.” Like every race car driver, investors these days need to think long term, finishing the race, not just spurting here and there but never crossing the finish line. They need to slow down for the undulations in the track, and accurately read the conditions of the economic landscape, ie. track.

You must master the technique of slowing down when enthusiasm takes over — stealing a phrase from my racing days, trail braking implies that in an imperfect world — when we have to think a little counter-intuitively. We are all called to settle down and find the fastest way toward our goals.

— Kenneth Willard Partch is a registered principal offering securities and advisory services through Independent Financial Group LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Santa Barbara Wealth Management is not affiliated with IFG. California Insurance #OA5470. Licensed to sell securities in California. Views and opinions are provided as a courtesy. They are intended for educational purposes only and not to be interpreted as specific investment advice. Ken Partch can be reached at 805.563.7699.

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