Add A Pinch Of Salt And Yeast To Your Portfolio: Financial Advisors' Daily Digest

Summary

• In which your correspondent derives investing lessons from the kitchen.
• Jeff Miller discusses the risk of a new trade war, and the problem with hiking tariff rates.
• Yuval Taylor discusses the factors predictive of EPS growth.

Please excuse today's random commentary, but I saw a passing reference to "salting away" one's wealth, and it got me thinking a bit about this curious phrase. Of course, I understood that salt was used in ancient times - and even in some places in the world currently - as a preservative. But I didn't know how salting meat or fish prevents spoilage, so I looked it up and discovered that the salt - by drawing out the water - fosters an environment unsupportive of bacterial growth.

This bit of food chemistry enhanced my appreciation of investing. Sure, "salting away" money for the future means saving money. But the "how" adds insight. Using the above analogy, we see that the effort to preserve something paradoxically requires a diminution of something else. When we desiccate our deli, we get to eat corned beef.

And so it is with wealth, which we get to keep by "drying out" the vitality which surrounds it; in other words, the risk to which it is put. A nice juicy growth stock can rise in value; when hit by a swarm of bad news, it can spoil. Take out it out of the water - i.e., remove it from risk, by converting it to cash - and it doesn't do much of anything, but you get to keep it as is. Other ways of removing risk might include working longer or late claiming of Social Security, both of which dry up the succulence, and risk, of an early retirement.

Going a little further with the food theme, yeast struck me as the relevant metaphor for growth. For those who would like some more "dough," it's this little leavening agent that makes our bread rise. The single-celled organisms feed off sugars (i.e., the sweetness of your principal investment that you worked so hard to save), breaking them down into carbon dioxide (earnings expansion), alcohol and flavor molecules (new or increased products and services). This fermentation process expels increasing amounts of carbon dioxide (akin to increased demand from buyers of stock), making your dough increase in volume. In non-culinary terms, it takes money to make money, which is to say you need to start out with some dough and incite its growth via yeast/risk.

The point of these metaphors is that we still find high-risk investors who are yeast-only, and scaredy-cats whose meager joy in life is a dry crust of bread. But those who like a more varied diet can perhaps more readily appreciate the benefits of actively seeking a steaming loaf of bread seasoned with added salt - that is, equity investments that grow, along with the preservative benefits of cash.

Please share your thoughts on this issue in our comments section. Meanwhile, below please find links to other advisor-related content on today's Seeking Alpha.

• Jeff Miller weighs the week again, include the risk of a new trade war.
• He adds further depth to the problem of hiking tariff rates in a second article.
• Yuval Taylor discusses the factors predictive of EPS growth.
• John M. Mason: Who is going to finance U.S. government debt?
• The Institute for Innovation Development searches for the ultimate client-advisor experience.
• For more content geared to FAs, visit the Financial Advisor Center.

Comments

[Jacob Rothman, CFA]

Mark Kurlansky wrote a best selling book on the history of salt. I just finished it. It is very long, but good. http://amzn.to/2FXmrR7

[fujilomi]

Balance is the key and knowing thy self and your reality. If you are young you can try yeast only because you have time to recover. If you are old, you need to salt some fish away unless you have already done so or are extremely wealthy like Buffet or Gates and what is a few billions to you. As a former avid fisherman, you don't want your investments to smell like unsalted dead fish on the beach.