Jesus Parables Money

Beware The Third Talent

According to the New York Federal Reserve Bank, America’s households are in a very strong financial position. Households own $68.2 trillion in assets and owe just $14.0 trillion in liabilities. Our net worth is $54.2 trillion. Our financial assets at $45.1 trillion are twice our tangible assets of $23.1 trillion.

The Federal Reserve report (Z-1, March 11, 2010) shows the asset allocation of directly held investments, as illustrated in the schedule below:

America’s Portfolio
($ trillions)

As you can see, the cash balance, at nearly $8 trillion, is the same amount as our stock investments. Cash investments pay about 2%. This is the same rate as inflation, so the real rate of return from nearly 40% of our investment portfolio achieves no real rate of return. This is a dangerously risk-averse allocation that is destined to underachieve.

How do you expect to grow your wealth when 40% of your portfolio earns nothing?

What are you afraid of, America?

Even a cursory examination of capital market history shows that stocks and bond prices can be volatile. So what? If they go down they always recover. Since the 1920’s we have had 19 bear markets in the stock market and 19 recoveries.

I used to do asset allocation studies for the large corporate pension funds I managed. The studies were extensive and expensive. We always ended up in the same place: 60% in stocks and 40% in bonds. Our allocation to cash was always zero because we understood the long term return from cash was nil. Individual investors need to understand this too.

The record of the stock and bond markets tells us clearly, it is much more dangerous to be out of the markets than in. It tells us the returns from stocks and bonds are volatile but will grow our wealth over time.

Cash has no permanent part in a portfolio. In the portfolios I manage, I have a stated objective of 100% invested position at all times unless extreme conditions exist.

If history is not enough, let’s consider what the wisest man who ever lived, Solomon, had to say about this. In Ecclesiastes 1.9, Solomon tells us “What has been will be again, what has been done will be done again. There is nothing new under the sun.” It seems pretty clear to me we can expect, in fact, we should expect more bear markets and more recoveries. It’s nothing new.

Solomon also told us about cycles. In Ecclesiastes Chapter 3 he tells us “There is a time for everything and a season for every activity under heaven: a time to plant and a time to uproot, a time to build and a time to tear down, etc.” That sure does sound like a market cycle to me. Capital markets go up and down. Count on it!

Your portfolio needs to go to work and grow your wealth. It cannot do that in cash.

What are you afraid of, America?

Invest your cash in assets that will give you consistent and high returns. Increase your investment horizons to cover at least one market cycle.

Jesus used parables or stories to get His points across. While His parables have many levels of meaning and wisdom, I want to address the literal interpretation of His parable of the talents.

A talent is a measure of silver and was currency in the time Jesus lived. A talent was the equivalent of several years of a workers wage. Applying it to today it would represent more than $100,000.

This parable is about risk taking and stewardship. It is about diligence and personal responsibility. It is about growth.

The parable is about three servants whose master gives each a different number of talents to manage in his long absence. When the master returned he asked his servants for an accounting. The first two doubled the amount they were entrusted with and received praise. The last was afraid and he buried the money he was given. He retuned to the master the amount he was given. The master said he was unfaithful and lazy, and expelled him from his house.

Forty percent of your portfolio is “buried in the ground” (in cash) earning you nothing.

What are you afraid of, America?

Are you being like the unfaithful and lazy servant in the parable? Have you organized your investments for appropriate risk levels and returns?

According to the Investment Company Institute, there are at least 92 million individual investors. Based on this household data from the Federal Reserve, millions of you are not allocating your investments for the best result. Maybe it is because you think there are not enough eligible investments. Maybe that is true. Maybe we don’t have enough “good” investments because of risk-averse environment we have created.

We can change that starting with the ballot box. Ninety two million investors can insist on an environment that rewards risk-taking and encourages economic growth. Elect representatives that will begin to dismantle the massive and mostly failed government programs that are now 25% of our economy. And more important, elect representatives that will cut taxes and burdensome regulations rather than stifle risk taking and economic growth.

If 92 million individual investors voted for growth, then it would be impossible to elect radical socialists like Obama and half of Congress. Lower taxes and less government regulations are the key ingredients to encouraging risk-taking.

Vote for growth and put your cash to work.

What are you afraid of, America?

But we would be irresponsible to blame a lack of investment opportunities solely on the government. Even with heavy handed and oppressive government involvement, we still must search out and invest in assets that will grow our wealth.

After forty years of investing I have come to the firm conviction that earning something every day on your portfolio is the best overall protection there is… protection against idiot politicians, inflation, deflation, economic dislocations or natural catastrophes.

May you live long and prosper,

Mike Williams, CFA
Chief Investment Officer
Panhandle Portfolios, Inc.

About the Author

Mike Williams, CFA is the high income fund manager and Chief Investment Officer for Panhandle Portfolios, Inc. He’s also the editor of the “True Income” newsletter for Stansberry Research, an independent investment research firm. Mike has a BBA from the University of Massachusetts, an MBA from Southern Illinois University, and has held the Chartered Financial Analyst (CFA) certification since 1990, Certificate #13376.

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