Spring 2015

Directions
Spring 2015
For your journey to lasting wealth and security
In
In This
This Issue:
Issue:
Welcome
Welcome Darren
Darren Timothy
Timothy Munn
Munn
First
First Quarter
Quarter Market
Market
Commentary
Commentary
What
What AOL
AOL Taught
Taught Us
Us about
about
Investing
Investing
Welcome
Welcome Drew
Drew Steinman
Steinman
Maurice
Maurice Clarett
Clarett Shares
Shares His
His
Story
Story of
of Life
Life Change
Change
Welcome
Darren Timothy Munn
Munn Wealth Management is a highly
credentialed team of professionals whose
mission is to see our clients achieve Security
through the stewardship of their assets, by
providing advice with Wisdom and Integrity.
A diverse mix of investments-- individual stocks,
individual bonds, mutual funds, Exchange
Traded Funds (ETF), and hedging vehicles-compose the “tool box” we utilize to manage
each account.
We align our interests with those of our clients
through our fee-only compensation structure. We
do not receive commissions from any investment
company or product, thereby eliminating many
of the conflicts of interest inherent in the
industry.
Munn Wealth Team
Darren Munn, CFA, CIO/Chairman
Carol Kowalski, Administrative Assistant
Cindy Westlake, Receptionist
David Munn, CFP, Financial Planner
Drew Steinman, CPA, Research Analyst
Grant Sims, Service Advisor
Jennifer Rogers, Chief Compliance Officer
Karen LeCompte, CFP, Financial Planner
Phil Ruyle, JD, Senior Advisor
Sarah Berndt, Senior Portfolio Manager
The MWM team is excited to welcome Darren Timothy
Munn. He was born to Darren and Erin on March 18th,
measuring 7lb 5oz and 20” long.
Our Team
Camelot Portfolios Team
Ryan Zeeb, Chief Executive Officer
Eric Kartman, Research Analyst
Laura Noble, JD, Wealth Consultant
Matthew Moses, CAP Executive Vice President
Rebecca Perez, CB, Executive Assistant
Tammy Strause, Director of Account Services
Advisory Board
Dan Rogers, Cherry Street Mission
Ed Reiter, Retired
Albert J. Caperna, CMC Group
Jim Lange, Truth@Work
Jay D. Malcolm, Expand Interactive
Keith Burwell, Toledo Community Foundation
Russell R. Miller, Rohrbachers Cron
Tom Beutler, Mosley, Pfundt & Glick
Ken & Jean Lovejoy, Retired
Hon. Richard Knepper, Retired
Past performance does not guarantee future results. As with any investment strategy, there is potential for
profit as well as the possibility of loss. All investments involve risk and investment recommendations will not
always be profitable. This document does not constitute a complete description of our investment services
and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment
advisory services. Any statements regarding market or other financial information is obtained from sources
which we and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or
accuracy of this information. Neither our information providers nor we shall be liable for any errors or
inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the
transmission thereof to the user. All investments involve risk, including foreign currency exchange rates,
political risks, market risk, different methods of accounting and financial reporting, and foreign taxes. Your
use of these materials is your acknowledgement that you have read and understood the full disclaimer as
stated above. 1323AGV
2
growth were too high, interest rates would stay
relatively low for longer than many expect, and greater
opportunities existed outside the S&P 500, the first
quarter played very well into our thesis. Most of our
strategies turned in very strong performance – nearly
across the board. In general, the ones that lagged last
quarter produced the strongest returns to start the year
as small caps and international stocks looked much
better relative to the S&P 500 – as we suggested was
likely to happen at some point.
First Quarter Market
Commentary
By Darren Munn, CFA
Boring! If there is one word
that sums up the first quarter in
the financial markets, that is it.
After a bit of excitement in the
previous quarter, 2015’s kickoff
was rather tame and, in many
ways, the inverse of last quarter.
The S&P 500 ended slightly
higher and barely moved more than 2% from where it
started the year. Economic numbers were equally as
boring, likely extending the time before the Federal
Reserve starts to raise short-term interest rates.
Positives
• The unemployment rate continued its slow grind
lower – dropping to 5.5% after starting the year at
5.6%.
• Low oil prices continued to keep gasoline prices
fairly attractive. While sub-$2 gas is not likely
anytime soon, we think sub-$3 is likely here for
most of the year.
• Lower interest rates created another great
opportunity to save money as mortgage rates were
still very attractive.
Oil still dominated the headlines with its wild swings –
often times 5-10% per week. But, it ended the quarter
slightly higher after bottoming out early in the year,
leading us to believe it has stabilized and will continue
to trend slightly higher from here.
Challenges
• The drop in oil prices (and other commodities)
created numerous painful ripples – energy-related
jobs were highly affected, although we expect it
will only take another year or so to work off the
energy glut.
• Housing – growth in the market for new homes
was still very sluggish.
• Valuations – As corporate profits are expected to
have dropped in the first quarter and equity prices
continued to move higher, stock prices are still at
the upper end of the “normal” range, which means
we expect lower returns from stocks in future years.
As interest rates dropped further, bond prices now
look very expensive & risky in many cases, making
it much more difficult to get decent yields with
low-volatility investments.
• Dollar strength relative to other currencies was a
head-wind for exports.
The Dollar continued to rally – up around 10% for the
quarter and nearly 50% over the last year compared to
the Euro. Anyone up for a European vacation?
As the quarter wound down, an old familiar story started
to rise again as Greece is once again on the brink of
default. While things have been relatively quiet out of
Russia, we don’t believe it will stay that way. Nor do we
believe the “boring” market movement will be with us
long. Volatility is inevitable.
Stocks – While the S&P 500 registered another positive
quarter, it was up just under 1% and trailed most of the
other major domestic and international market indexes,
as we expected would happen at some point.
Bonds – Interest rates continued to slide lower to start
the year, leading to nice gains in most parts of the bond
markets, including those that were roiled by oil last
quarter. The 10-year treasury ended the quarter around
1.9% after briefly dipping below 1.7% in January.
Opportunities & Risks
• The drop & stabilization in oil prices has led to
strong opportunities for gains in much of the energy
& materials sectors.
• Lower energy prices will help lower expenses
As we have believed the expectations for US economic
continued on page 4
3
continued from page 3
What AOL Taught Us
about Investing
for consumers and businesses, leading to greater
discretionary spending and higher profits,
respectively.
• Low interest rates will likely reignite moderate
growth in housing markets.
• Russia, ISIS, North Korea, Iran – enough said.
• Volatility – this is (and always will be) a
short-term risk, but long-term opportunity. Expect
volatility as it is a normal part of investing – the
last few years have been abnormally calm. As
always, we will seek to embrace and capitalize on
it for your benefit.
By Drew Steinman, CPA
During the 1990s a company called America Online
(AOL) emerged as a leader in the internet revolution.
AOL was most notably known as a provider of dial-up
internet service starting in the early 1990s. In 1996,
AOL made the decision to switch from an hourly
pricing structure to offering unlimited usage for a flat
monthly fee. This change led to an explosion of new
users. In a few short years AOL had over 10 million
users and they could not keep up with demand. AOL’s
servers were maxed out and customers complained
they were not able to stay online.
Welcome Drew
Steinman
Despite their issues, AOL was able to dominate the
market, at one point providing internet service to over
50% of Americans using the internet. One key to AOL’s
stronghold was their development of AOL Instant
Messenger (AIM). In a world before cell phone text
messaging, AIM was a huge part of many Americans’
lives during the 90s as it allowed users to send instant
messages to their friends. In the early years, users had
to use AOL to have AIM and since AOL had over a
50% market share, those without AOL could not
communicate with most of their network.
We are excited to welcome
Drew Steinman, CPA, as the
newest member of our team.
Drew began his career in
public
accounting
and
worked as an analyst in the
health care industry before
joining Munn Wealth Management in 2015 as an
investment analyst and tax professional. After
graduating from the Fisher College of Business at
the Ohio State University with a BSBA in Finance
and Accounting, he earned the Certified Public
Accountant (CPA) certification. Drew has managed
the Leveraged Value portfolio on Covestor.com
since 2013 while writing articles on Covestor’s
Smarter Investing blog. He is currently pursuing the
Chartered Financial Analyst (CFA) designation.
As value investors, we rarely invest in high flying
technology stocks due to price. But aside from price
there are two very important questions to ask before
investing in a stock for the long term.
1. Does the
advantage?
Drew was a leader in CRU at Ohio State and now
serves as a community group leader with his wife,
Chelsea, at Findlay Evangelical Free Church. Drew
enjoys playing many sports, especially basketball
and golf. Drew also enjoys spending time with
friends and family, playing strategy games, and
learning about a wide a variety of industries.
company
have
a
competitive
2. Is their competitive advantage sustainable?
In the case of AOL, the answer to the first question was
a resounding yes. Customers were sticking with AOL in
spite of poor service because moving to a competitor
meant losing communication with their social network.
But when we look at these two questions, it’s the
second question that is harder to predict. For a short
time AOL was able to sustain their competitive
advantage, but eventually the game changed. Microsoft
He can be reached at
drewsteinman@munnwealth.com
continued on page 5
4
continued from page 4
Netflix model, I believe original content will set
Netflix apart. Netflix has had great success with
shows like House of Cards and Orange is the New
Black which draw in more subscribers.
began to program their instant message service, MSN
Messenger, to allow its users to chat with AIM. This
led to a back and forth battle where AOL would block
chat between MSN Messenger and AIM and then
Microsoft would make changes to restore this
functionality. AOL eventually lost this battle and raised
their white flag when they made AIM available to all
internet users. Of course, it was just a few years later
that the proliferation of social networking sites like
Facebook, as well as texting-enabled cell phones
would have also likely eliminated this competitive
advantage.
But of course we still need to determine if Netflix’s
advantages are sustainable. It’s hard to imagine a
competitor making video more convenient and
accessible than a smartphone app that’s available 24/7,
but what about content? Why doesn’t the competition
create original content like Netflix? The answer is
scale. It’s estimated that Netflix controls about 57% of
the video streaming market while their largest
competitor (Amazon video) controls about 3%.
Netflix’s massive scale allows them to invest much
more in creating quality content while Amazon
video’s original content has been largely unsuccessful.
AOL was not without other problems. At the height of
the tech bubble, AOL merged with Time Warner in
what is now considered one of the worst mergers of all
time. This may have contributed to their
unpreparedness for the major industry change that
followed. AOL was the king of dial-up internet and
when high speed internet emerged, AOL was left in the
dust, unable to adapt quickly enough. The value of
AOL’s stock rapidly went from over $200 billion to
$20 billion and today a reinvented remnant is worth
about $4 billion.
As long-term value investors these are the kinds of
questions we ask. We look at the competitive
environment of the industry as a whole and beyond
what numbers alone can tell us. It is with these
principles that we aim to spot warning signs in
companies like AOL and identify strengths in
companies like Netflix.
So how should we invest today to avoid these pitfalls?
One key is to identify companies that have more than
one competitive advantage. For example, Netflix, a
current holding in many of our individual stock
portfolios, has at least three competitive advantages:
Maurice Clarett Shares
His Story of Life Change
1. Accessibility - When comparing Netflix to a
Redbox or Family Video, it’s just more accessible.
I don’t need to drive out to the video store, find the
movie, and then drive back to return it. I just utilize
my computer or television and watch right away.
Several members of our team had the opportunity to
attend the Fellowship of Christian Athletes’ Hall of
Champions Celebration at The Pinnacle on April 13th,
with guest speaker, Maurice Clarett. Most college
football fans will remember Clarett for his starring role
when the Ohio State Buckeyes won the 2002 National
Championship--and his subsequent downfall. After
being dismissed from the university for compliance
violations, he was arrested multiple times, convicted of
armed robbery and imprisoned at the Toledo
Correctional Institution, where his life began to change
for the better.
2. Convenience - Netflix is much more
convenient than television because I don’t have to
plan my schedule around what time my favorite
shows air on TV. I can watch them whenever I
want and as many times as I like, without
commercials. And while Digital Video Recorders
(DVR) provide some of this same convenience, it
is far more expensive.
While in prison, Clarett became an avid reader,
estimating he finished over 200 books. He shared that
he was captivated by business and finance books,
especially those by Warren Buffett (whom he had the
3. Original Content - As Amazon Prime Instant
Video, Hulu and other competitors try to copy the
5
continued on page 6
1700 Woodlands Drive, Maumee, OH 43537
(419) 794-0536
www.munnwealth.com
Address service requested
opportunity to meet several years later) and Bill Gates.
He enrolled in a distance-learning program, working
towards earning a bachelor’s degree. Originally
sentenced to serve 7 years, Clarett, who was described
as a model inmate, was released after 3 ½.
Though he had been in involved in church and religious
activities his whole life, participated in Kairos, a
Christian prison ministry while incarcerated, and read
large sections of the Bible, it wasn’t until several years
after his release that Clarett said he began a personal
relationship with Jesus Christ, through the influence of
fellow football players.
When attempts to revive his football career fizzled,
Clarett decided to move on. He returned to Ohio and
has since started multiple businesses, primarily public
speaking and as a pallet supplier. In 2013, he was
featured in Youngstown Boys, an ESPN documentary.
Maurice Clarett’s story serves as a reminder that even
the most hardened hearts can be changed. Now a
soft-spoken, humble business man, he spends much of
his time speaking to at-risk youth, both in and out of
prisons, hopeful they can learn from his mistakes.
Maurice Clarett and Munn Wealth’s Grant Sims
6