QUARTERLY NEWSLETTER – 4TH QUARTER 2018

In our Q4 2018 newsletter we’ll take a look at two investing legends who are decidedly long-term thinkers, why gold is performing so well of late, and a company that is profiting from the people’s mistaken belief that debt is the same thing as capital.

In memory of investing legend Jack Bogle

“You want to be average and then win by virtue of your costs. Cost is a handicap on the horse. If the jockey carries a lot of extra pounds, it’s very tough for the horse to win the race.” – Jack Bogle

Using this underlying philosophy, investing legend Jack Bogle – who died January 16th at the age of 89 – founded the Vanguard Group in 1974, which now has over $5 trillion in assets under management. Considered one of the world’s greatest investors, Bogle avoided market timing, instead preaching a philosophy of buy and hold investing. He was not only an investing sage, but also earned a reputation for integrity and old-fashioned values in business and in life.

The index fund is widely regarded as Bogle’s most important innovation. He pioneered low-cost, low-fee investing and mutual funds tied to stock market indexes. Although many ‘financial experts’ at the time scoffed at his approached, over the years Vanguard has enabled millions of Americans to build wealth and retire comfortably.

Bogle proved that a mutual fund that represented a wide range of businesses – such as the S&P 500 – would not just match the average return of the stock market but almost always surpass the performance found in actively managed funds. Not known as a man for mincing words, Bogle would often publicly criticize his peers in the investment arena for what he viewed as their out-of-control speculation, wanton assumption of debt, multi-million-dollar paychecks and golden parachutes.

Egos being what they are in the financial community, Bogle’s critics fought back, calling him a Marxist, communist, and a traitor who was undermining the pillars of American capitalism. Vanguard’s customers clearly disagreed with these characterizations. Today, Vanguard is one of the largest investment-management companies in the world. The firm competes with the likes of BlackRock and Fidelity Investments for the title of the biggest mutual-fund group.

Gold hits an 8-month high

At the time this newsletter is being written the price of gold on the spot market is $1,310.60 per ounce, setting an 8-month high for the precious metal. The last time that gold broke the $1,300 mark was back on June 14th of last year when an ounce of the metal was priced at $1,302.70.

While it’s difficult to point a finger at one single reason boosting the price of gold, a look at some recent headlines from January 30th alone help explain why the precious metal has been performing so well:

• Global oil industry braces for turmoil as the U.S. cracks down on Venezuela
• U.S. crude stockpiles rise less than expected
• Fed set to hold rates steady as it navigates the ‘blind spots’
• J.P. Morgan sees the Fed tightening less than expected, leaving $1 trillion in excess reserves
• U.S. pending home sale fall by 2.2% in December
• Treasury says the U.S. debt ceiling won’t hold back issuance of short-term debt
• Newmont Mining merges with Goldcorp, creating the world’s largest gold producer by both production volume and reserves
• Trump to Lawmakers: Don’t waste your time, deal needs wall
• Gold prices holding $1,300 as U.S. consumer sentiment drops in January

Throughout the ages, gold has been recognized as a safe-harbor investment in a sea of economic and political uncertainty. So why is it that another well-known investing legend doesn’t like gold?

Why Warren Buffett doesn’t invest in gold (but does own silver)

Warren Buffett sees no value – or usefulness – in gold. Buffett has three basic investing principles:

• Invest in things that are useful
• Invest in things that serve some purpose
• Invest in things that supply a practical need that people have

According to Buffett, gold doesn’t meet any of these principles. He has this to say about gold: “It doesn’t do anything but sit there and look at you.”

It’s not that Buffett has an aversion to precious metals. In fact, he loves silver, having invested nearly $1 billion in the metal because it meets his requirement of having an identifiable value.

Silver is uniquely suited for a variety of industrial uses. For example, silver is used in bandages, catheters and as a healing agent for burns. It’s used for water purification. Because it’s a great conductor of electricity and doesn’t corrode, silver is used extensively in wiring and electrical connectors and in computers, cell phones and cameras.

Other than making beautiful jewelry, in Buffett’s opinion gold has no other inherent value, is not a good financial asset, and isn’t a substitute for money.

People are filing Chapter 7 bankruptcy online, for free

Oftentimes people – and one could argue governments – view debt as a substitute for money. Eventually people simply don’t have enough real money to pay their debts and can’t borrow any more.

When that happens, they’re forced to file for bankruptcy to protect what little they do have. But even filing for bankruptcy costs money, which means the people that can least afford to file are often the ones that need help the most.

Launched in the summer of 2016, a company called Upsolve is automating the Chapter 7 bankruptcy process online and for free. Billing itself as the ‘TurboTax for bankruptcy’, the software system gathers user-specific information through a series of question, then provides automated bankruptcy forms that are reviewed by an Upsolve attorney – all at no cost.

Since its launch in 2016 the company has processed $16 million in bankruptcies for 400 people and has diagnosed debt problems for 5,000 people last year alone. Because bankruptcy is based on federal law rather than state law, Upsolve’s online bankruptcy filing solution can work across the country.

So far, the legal community doesn’t feel threatened by Upsolve. That’s because many Chapter 7s aren’t profitable and need to be handled pro bono. They’re also fairly uncomplicated because filers don’t have a lot of assets to begin with.

Although the service is fee, Upsolve does follow the ‘tipping model’, asking users to donate whatever amount of money they think is fair. The model is working, with donations from filers covering the company’s operating costs.

Upsolve also receives funds from the Legal Services Corporation – an independent nonprofit established by Congress in 1974 to provide financial support for civil legal aid to low-income Americans – and has also been funded by Harvard University, Schmidt Futures (founded by Eric and Wendy Schmidt of Google), Fast Forward, and Breyer Labs.

Making money is difficult but so is keeping it

We’re out of the longest government shutdowns in history and it may be closing again, only a handful of people know when the trade wars between the U.S. and China will end, the Fed and the World Banks are waffling on decisions to raise or cut interest rates, so investing in today’s chaotic global business environment means combining the long-term thinking of Jack Bogle, the pragmatic approach of Warren Buffett, yet being nimble enough to react to unexpected changes in the market place that are occurring with increasing frequency.

We look forward to sharing our thoughts again in our next quarterly report. In the meantime, should you have any questions, we look forward to hearing from you.

Very truly yours,

Alexander Philips

Chief Executive and Investment Officer