Landscaping and Gardening

This is the summer issue of the quarterly letter, when I try to paint a broader picture for friends and clients. Part of the motivation is practical—studies show that a large proportion of the investing public has no idea how wealth is created (or destroyed) in the capital markets even though the success or failure therein is critical to their long-term well-being. Another part of the motivation is the fun in finding metaphors to explain how things work. How often have I seen eyes glaze over when I use finance –related terms to describe an investment strategy, and for good reason—the terms bear little resemblance to things we do and see in everyday life. So here is one way to explain what I do: a lot of landscaping and a little bit of gardening.

If you look around today, landscape architecture is often an afterthought---it involves putting in some trees to screen out the neighbors and putting in some flowerbeds for color. However, the real intent of landscaping over time is to build a place where arboreal and floral nature interacts with whatever space you have to produce intended and unintended beauty. Your eye is drawn to it, you want to walk around in it, and you know it when you see it. However, like investing for the long haul, it takes planning, time and patience. All gardeners and landscapers garden, to an extent, but very few gardeners really know how to landscape.

Consider the following:

	Landscaping	Gardening
Philosophy	Investors	Traders
Framework	Asset Allocation	Timing
Goal	Capital Appreciation	Short-term gains
Psychology	Patience	Frenzied
Actions	Staged over time	Repeated frequently
Reference Period	Long Term	Today

Working our way up from the bottom of the chart, you can see that it takes time to implement a good investment or landscaping strategy. Secular trends in investing last 10-20 years and that is our Reference Period. Many evergreens take that long to mature to average height. Think about that when you plant that big spruce right next to the house—is that what you want for the long term? For us, it is figuring out how to make good investments as world economic power slowly shifts toward Asia. That is a long process, but believing it to be true, what can we do to take advantage of it?

What Actions are important to landscaping? The best answer is to stage them over time. At a minimum, for bigger properties, take four years to get each direction right. Those shade loving rhododendruns are going to burn out in southern exposure, but love the north and west. Similarly, we take our time moving to full allocation—right now, we are not investing new money in bonds because cash is paying us just as much. In addition, as many of you have noted, we are especially active as buyers when the equity markets we like long term are being crushed. Those markets appeal to long-term investors with a plan.

The Psychology of landscaping is patience. Hollies when newly planted will sometimes suddenly thin out and stay that way for 2-3 years. I have one that is 25 years old that I transplanted seven years ago---it finally fully budded out this year for the first time and is a beautiful 20-foot mass of various shades of green. Some of our water investments have been slow to show much promise. However, the world’s water infrastructure is in horrible shape and needs massive investment and its time will come.

Our main investment goal is to solidly beat inflation over time—to do that, we want Capital Appreciation in the most tax efficient way. Therefore, we invest in dividend paying stocks and hold on in order to get the best possible tax treatment. A beautifully landscaped property will similarly appreciate over time, and will pay us visual dividends along the way. In the same spirit, we try to discern long-term investment trends and find a way to buy into them before the herd does. We look for investments in early stage health care because an enormous amount of aging and affluent baby boomers will be paying top dollar to have healthier lives.

The framework for this activity is Asset Allocation—the right mix of equities, fixed income, commodities and cash. Similarly, you have to think about the right mix of trees and plants for a direction—you want to get the right screening, color and heights that will work over each season. Remember when something is doing well (like black-eyed susans and large cap equities today), there are always things that are not (like day lilies and real estate stocks). Whether we buy or plant more of what is not doing well is a function of the long-term secular view—so buy more day lilies and I will get back to you on real estate stocks!

So at the end of this ramble, we find ourselves back at the beginning, at the top of the chart. We define ourselves as Investors, and are in philosophic kin to those who define themselves as landscapers. We have a long-term plan, we are committed to it and we will use the proper tools and actions to carry it out. We do some gardening here and there, some timing and trading to find proper entry points to investments, but mostly we have our eye on the landscape before us, trying to discern the larger picture.

My best to all,

John III



JA Forlines, LLC
Investment Advisory
A Core Asset Management Company

johnforlines@jaforlines.com