HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
Investment
managers & WEALTH Advisors
October 6, 2005
This is the October 2005 monthly Wealth Management newsletter from Hoffman, White & Kaelber Financial Services, LLC. If you do not wish to be included in our circulation, please reply indicating your desire to be removed and we will be happy to oblige. Alternatively, any of your friends or colleagues may receive this on a regular monthly basis by sending their name and email address to info@hwkfs.com. Feel free to forward this to any of your friends who may find it useful. Thanks for your interest and I hope you enjoy the letter.
If you said
your house or your car or your investments, you'd be wrong. Your family’s most valuable asset is its
members. It is your spouse, your children,
your parents, your brothers and sisters, etc. who embody the spirit, passion
and vitality that create the sense of family.
It is a close knit group of people who share life experiences together
and turn these lessons into a network of woven lives that get handed from
generation to generation.
In determining a family’s resources, we believe that there
are three fundamental types of family wealth.
They are financial capital, intellectual capital and human capital. Most families pay very close attention to
managing their financial wealth. It is
easy to measure progress in this area.
You get specific numbers and you can observe incremental changes on a
daily basis if you want to. The
intellectual and human capital of a family on the other hand is more difficult
to track. Its accumulation is not as
easy to measure. Progress is more
intangible. Yet the family’s primary
purpose should be to nurture and develop it’s intellectual and human capital.
For arguments sake, lets consider intellectual capital of a
family as what it knows (its raw materials) and its ability to apply what it
knows in capitalizing on opportunities.
Also, let’s consider intellectual capital as the effectiveness a family
displays in resolving the threats that life presents. Human capital, as mentioned above, are the
family’s members who – hopefully – act productively on what it knows (its
ability to execute its intentions) in its own best interest. The financial capital of a family provides
the wherewithal to grow the other two.
As readers of my newsletters well know, wealth management is
the ultimate goal of all that we do at Hoffman, White and Kaelber. Yes, we promote our services; yet, you will find that we always
seek to present thought provoking topics that are relevant to our wide
audience.
This
month’s newsletter is from my good friend and colleague, Dr. Dan Elash, who
recently joined forces with us. Dan
rounds out our wealth management business by focusing on issues that include
coaching clients through lifestyle transitions, such as retirement, business
succession or family continuity and governance matters. In this newsletter, he explores the concept
of human capital and brings into sharp relief the benefits of caring for as
well as the detriments of paying too little attention to this crucial element
of a family’s wealth.
Lastly, we will
finish with a review of the economic and investing climate for the month past,
the current market outlook and our investment performance.
Human Capital
Let’s look
at human capital on an individual level.
It is the yeast that causes the dough to rise. Take a moment to think about the personal
traits and characteristics of highly successful people. The average person may assume that a child’s
character resides totally within his or her DNA, given (or not given) at birth
and developing naturally as the child’s life unfolds. This school of thought naively assumes that
the essentials for success are either present or absent and we (as parents) can
only watch, with bated breath, our children grow to see what personality
emerges. More aware people understand
that character can be nurtured and developed throughout a person’s life. Wise parents can form positive associations
with their children that help them develop their innate abilities to their full
potential; to learn to learn from their experiences; and to help them to
compensate for their weaknesses.
Developing human capital requires close attention, on-going dialogue and
a sense of trust by the child in the care of the parents.
It is
generally accepted thinking that a child with a well-developed character will
be better equipped to succeed in life.
This doesn’t guaranty a life that is problem free. Life does not work that way. What it does mean is that every challenge
turns into a learning opportunity for a child to develop his or her abilities
to understand, address and resolve those challenges successfully. Children afforded such experience will
develop the personal resources to persevere through adversity. They learn to make constructive
decisions. They have the interpersonal
skills to develop rich and fulfilling relationships throughout their
lifetimes. They have a sense of purpose
and an ability to focus in a way that guides their choices and leads to a rich
sense of competency and confidence. It
is easy to see how a family that successfully develops the human capital in its
members is richer than one that doesn’t.
Ignorance Is No Excuse
Families that
don’t tend to their human capital either don’t realize that they can affect its
development or they just don’t know how.
We all want our children to succeed.
We simply differ on our beliefs about how we can make that happen. There are some recurring themes in the
thinking of families who don’t place a high priority on tending their human
capital.
We want to indulge our children:
When you have the financial resources to indulge our loved ones, we are
often sorely tempted to do so. We give
them a sense of entitlement. We skew
their sense of perspective and proportion.
We do not allow them to practice developing the muscles that striving
for what we want produces. We take from
them the sense of competence that comes from overcoming obstacles and from
using our internal resources to make things happen. Especially in childhood, it is the little
struggles that stimulate these capabilities and lay the groundwork for the
deeper skills required to handle more difficult, adult challenges.
We keep our children safe from the
blows of life: I am continuously amazed at how many parents
work so diligently to keep their children innocent, naïve, and ignorant about
the real world. We delay their ability
to cope by protecting them from the little risks of childhood. Yet, it is in learning how to cope and
survive these disappointments that we begin to develop the ability to
confidently face adversity. Making them
strong is a much better strategy then keeping them ignorant.
We devote
most of our energy to work and expect that children will know that we “are
doing this for them,” and that they will feel loved and appreciative in
return. This is an erroneous
assumption. Children never have the
perspective to parse such a complex chain of reasoning. Rather, kids see themselves as the center of
the universe, prime movers in their worlds and if they don’t get the love and
attention they need they will believe that the fault lies deep within
themselves.
Failing To Tend Human Capital
What’s the
goal of a family? To my way of thinking,
it is to launch competent, healthy and successful children into the world. Money alone is insufficient to accomplish
this task. How many of you have dealt
with your children’s issues and been puzzled because you have given them so
much, so many opportunities and yet they lack the character to handle
themselves well? The fact of the matter
is that it takes more than opportunity to raise a competent child. It takes directed experiences, life lessons
well learned, and a family culture of love and respect. These things cannot be assumed or intuited,
they have to be experienced. In order to
create the circumstances for healthy development parent’s actions have to align
with their words. It doesn’t matter how competent other people are in caring
for your children, kids will always harbor doubts about themselves if their
parents don’t back their words with the actions, choices and priorities that
give their words authenticity. This
means that the parents have to be actively involved is nurturing the human
capital of the family. Spending an
inordinate amount of time tending to the financial wealth of the family won’t
allow the parents adequate time to do that.
The signs of
poorly tended human capital are many but they are usually obvious. Children with low self esteem, feelings of
entitlement, lack of appreciation, self-absorption, under achievement,
corner-cutting, lying, acting out, disrespect for self and/or others, and the
like are common symptoms of children in need.
The reality is that these children, regardless of their other
advantages, are showing that they are not prepared to face life successfully. They will continue to squander opportunities
and dissipate the family’s resources because they lack the skills to do
otherwise. This is not to say that these
kids are totally incompetent. It is
simply that they lack the full range of skills to experience the pride and
self-fulfillment that all people seek.
So, how do
well intentioned parents wind up in such circumstances, you might ask? Good intentions are simply not enough. You must use the work of the family, its
tasks, challenges and opportunities as the practice fields for building social
competence in all of its members.
Children need to be coached and mentored through the trials of
life. They need to see their parents
learn and cope. And, they need to
experience the consequences of their actions in ways that are designed to teach
them to manage themselves effectively.
Tending Human Capital
While their
isn’t room in a newsletter such as these to detail everything that families can
do to tend their human capital, we can identify key elements in family life
that will point the way for them to address this critical area.
Spending Time – You can’t coach and mentor
children successfully if you do not spend time with them. It’s not a distraction from more important
things; it is the work of the family.
You have to know what’s happening in your child’s life to be available
to steer her or his development. Having
quiet time to simply be together is more important than simply engaging in
structured activities simultaneously. If
this is difficult for you to do, if there is awkwardness or if conversation
proves difficult, that is a clue that the family has work to do.
Family Purpose – A critical component for a
healthy development of children is for them to develop a sense of purpose for
their lives. One powerful way to
accomplish this is for them to be a part of a family with a well-articulated
sense of purpose. Taking the time to
develop a family mission statement helps everyone develop the focus, sets the
priorities, and embraces the values crucial to healthy personal development.
Fire-Testing Character – Overwhelming stress and
challenges that are beyond us are destructive to anyone, particularly
children. Yet stress and challenges, in
manageable doses, are critical for propelling us to reach our potential. Parents must strike a thoughtful balance
between keeping children safe and exposing them to situations that allow them
to test themselves in the fire of experience.
These experiences temper character and strengthen people for the
inevitable challenges that will come later in life.
Experiencing Consequences – Bad choices and poor decisions
come with consequences. When parents
intervene (whether through love or pride) to protect their children from the
natural consequences of their behavior they rob them of the ability to profit
from their experiences. This is a
difficult thing for parents to avoid, but it is essential to tending human
capital. Don’t rescue them. Do work with them to ensure that they draw
the conclusions and learn the lessons that foster personal growth.
Launching Competent Human Beings
As stated
above, this is the primary job of a family.
It is as crucial to the long-term preservation of financial wealth as it
is vital to the long-term well being of everyone in the family. In order to succeed at this task a family
must have the deliberate intention to launch competent children into the
world. The family must then deliberately
and thoughtfully execute that intention.
No one will do it perfectly.
Children do not come with instruction manuals. It requires continuing attention for the job
is never totally done. This takes time,
energy and dedication. If you invest
your energy in building your family’s human capital you will be laying the
foundation for the family’s success in generations to come.
Concluding
Thoughts
I hope you
have enjoyed Dan’s authoring of this month’s letter. I’ve invited him to write for us once each
quarter and I’m sure he’ll continue to provide us an “out-of-the-box” view of
wealth management.
Hoffman, White & Kaelber Financial Services Investment Performance
Update
Hurricane
Katrina was the costliest storm ever to hit the
The impact
on energy prices was immediate and dramatic.
Oil prices were briefly pushed above $70 per barrel and gasoline prices
passed $3 per gallon. Nevertheless, many
of the economists we follow lead us to believe that energy market conditions
will return to the pre-hurricane levels over the next few months and that
gasoline prices will continue to ease.
By year-end, however, consumers will still be paying 35-40% more than in
December 2004, and home heating bills are expected to be 30-40% higher this
winter.
Energy
costs are now biting into consumer budgets more severely than at any time since
the early 1980s. Economists believe that
US households (even though our savings rate is projected to be less than zero
percent at present) can absorb some of the shock, especially if the spike
proves temporary. But it is unrealistic
to suppose that consumers – especially lower-income consumers for whom gasoline
forms a relatively high share of their budget – will simply carry on spending
as if nothing had happened.
For the month ended September 30, 2005, our
one-month performance is up 1.41%, our year-to-date return is up 4.20%, and our
average annualized return since inception is up 8.71%. While volatility continues to increase its
vigor in the equity markets, our risk profile continues further
downward to +/- 5.60%. This
conservatively low risk level remains consistent with our strategy. With our expectation that this statistic
gains increasing importance, our Sharpe Ratio is more than respectable at 1.24.
Is a comfortable retirement or preservation of wealth important to
you?
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