The 5 Essentials for Smart Investing, With John Kauth of Intercontinental Wealth Advisors

Jason Hartman
Feb 9, 2020 · 8 min read

Passive investment has massively outperformed active management, even before fees. But let’s define active management. If you decide not to reallocate your IRA because the market is doing so well, that is a form of active management. The best approach is tactical asset allocation. What this means is that after the asset allocation model is established, the weighting of the allocation to the various asset classes will depend on different variables. From valuation to momentum, to the political landscape, the allocation will be continually changing.

As a part of my series about the The 5 Essentials of Smart Investing, I had the pleasure of interviewing John Kauth. John has been a financial services professional for more than 40 years. He began his career with First National Bank of San Antonio and then became CFO of Transworld Financial Services Corp. In 1981, he co-founded The Intercontinental Companies to serve high-net-worth individuals, non-profits and corporations worldwide. He holds a BBA in finance from Texas A&M University and has authored numerous articles on international investment for state and national business publications.

An avid golfer, John co-founded UTSA 24, an organization that provides significant support for the women’s and men’s golf teams at The University of Texas at San Antonio. John has been active on the boards of the Cancer Therapy and Research Center Clinical Foundation, the Center for International Studies at Texas A&M University, the Alamo Colleges Foundation and Golf San Antonio.

Than you so much for joining us John. Can you share with our readers the most interesting or amusing story that occurred to you in your career so far? Can you share the lesson or take away you took out of that story?

In 1977, I was a senior at Texas A&M, getting ready to graduate, and one of my finance professors called me at home. He said he had a friend, the President of The First National Bank of San Antonio, who was looking for an assistant controller — and would I be interested in interviewing for the job. I was surprised he called me as I didn’t think of myself as a particularly remarkable student. And I had no idea that Professors could help you get jobs. I went to San Antonio for the interview and, basically, they offered me the job at the bank because of that one phone call. It’s where I met my wife of 39 years and my business partner of 38 years. You never know the impact one phone call can have.

Are you working on any exciting new projects now? How do you think that will help people?

I’m one of the organizers of a group of people here in San Antonio that raises money for the University of Texas at San Antonio golf teams. We do it in part because we love golf, but we especially love mentoring young people. We also think UTSA is very important to San Antonio’s future. One of the events is a tournament sponsored by the women’s golf team, where universities from all over the country come for a two-day event. It’s called the Maryb Kauth Invitational, named after my mother, so it’s something I’m very proud of and excited about.

Ok. Thanks for all that. Let’s now jump to the main core of our interview. According to this report in Fortune, nearly two-thirds of Americans can’t pass a basic test of financial literacy. In your opinion or experience what is the cause of these unfortunate numbers?

First of all, I believe there’s not only a lack of financial literacy at a very basic level, but it also exists among those who are already investors. Many people think about the stock market quite differently than they think about other things. For example: You see a pair of shoes you really like that cost $100, but you don’t buy them. The next day, you see them again, and they’re now priced at $80. You’re more motivated to want to buy those shoes. Yet if your portfolio’s worth $100 today and $80 tomorrow, the tendency is to want to sell the portfolio, not buy more. I think emotion is one of the biggest deterrents of portfolio performance for investors because the tendency is to get out when the market’s going down and not want to get back in until it’s gone back up.

Another misconception many investors have is thinking of each investment account, )i.e., 401K, IRA, personal account, annuity) as separate and distinct accounts, each with their own investment goals. The correct way to think about this is that you may have numerous investment accounts, but you only have ONE portfolio and an asset allocation strategy must be applied to all the accounts — the entire portfolio. Further the fully taxable investments such as corporate or government bonds should be put in tax deferred accounts and capital gain/dividend yielding investments should be put in taxable accounts.

If you had the power to make a change, what 3 things would you recommend to improve these numbers?

The most important thing is to have a long-term plan, one that’s well thought out and time tested, which would help avoid the day-to-day worry about market fluctuations. I’d also recommend regular contributions, perhaps every two weeks, to avoid the emotional behavior that too often drives people’s investment choices. Regular investments means you sometimes buy when a stock or fund price is up and sometimes when it’s down. Lastly, you should own a basket of investments that do not all move in the same direction as market conditions evolve.

Ok, thank you! Now to the main question of our interview: You are a “finance insider”. If you had to advise your adult child about 5 non intuitive essentials for smart investing what would you say? Can you please give a story or an example for each.

Each market cycle is unique, usually lasting about ten years. The current cycle that started in March 2009 has been pretty uncomplicated. But there are still some foundational essentials for successful investing.

Asset allocation does make a difference. Benchmarks are not particularly useful for measuring portfolio performance. Your best emerging market benchmark manager probably did worse than your worst performing US Large Cap manager. Investors will have to look for more nontraditional asset classes to capture meaningful returns. These asset classes may include private equity, global real estate, business credit and emerging markets. No one knows the future, but my guess is an all-in S&P 500 portfolio will not repeat itself over the next ten years.

Passive investment has massively outperformed active management, even before fees. But let’s define active management. If you decide not to reallocate your IRA because the market is doing so well, that is a form of active management. The best approach is tactical asset allocation. What this means is that after the asset allocation model is established, the weighting of the allocation to the various asset classes will depend on different variables. From valuation to momentum, to the political landscape, the allocation will be continually changing.

Measuring portfolio performance on a before-tax basis does not tell the entire story. Assume two portfolios, both invested 60% in US stocks and 40% in investment-grade bonds. However, Portfolio One owns growth stocks and corporate bonds and Portfolio Two owns a basket of dividend yielding stocks and home state municipal bonds. Obviously, Portfolio Two is more tax efficient since dividends are taxed at 20% to 23%, and home state municipal bonds’ interest is tax free on the federal and state level. So assuming a higher marginal tax bracket, Portfolio Two may underperform Portfolio One on an absolute basis, but after paying taxes, a different result may emerge.

Take a long-term view. Too many times investors get caught in Wall Street’s latest and greatest fad. Portfolio insurance is one example, along with risk parity, principal protected notes, or that anything with .com in their name will be a winner. How many people invest in last year’s hottest fund? Too many times last year’s hot fund/asset class becomes this year’s underperformer. Finally, everything you may know about a stock, everyone else knows too. The stock you are convinced will go up and want to buy is being sold by someone who is equally convinced it will go down. Only one of you can be right.

The last essential of smart investing is to understand risk mitigation. Since we are in Year 12 of a record bull market in US stocks, my guess is too many investors have forgotten, or never experienced, a meaningful market decline. I also worry that a large percentage of investment advisors were not in the business in 2008. Losses hurt and big losses are hard to make up. Retail investors irrationally sell when the market has sold off and get back in “when the market comes back,” i.e., when it’s high. A properly constructed portfolio is the best defense against big losses.

Here are five thoughts that might be non-intuitive:

  1. Buy when everybody else is selling.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

The person I’m most grateful to is Dr. Don Fraser, at Texas A&M, who thought I’d be a good candidate for the bank position. Without him, I wouldn’t have met my partner, Isidoro Korngold, who came to me when I was 26 years old and said, “Hey, let’s start a business.” He rolled the dice on me, and here we are. While at the bank, I also met my wife. Every entrepreneur needs a spouse that’s supportive, who understands that the entrepreneur travels, works, isn’t around a lot — but the spouse is there to come home and cry or complain to. My wife has been my stalwart supporter.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

“Don’t confuse intelligence with a bull market.” It’s easy to make money when everything goes up. The really good financial advisors are the ones who manage their clients’ money in down and in challenged markets. For example, for the most part, anything you bought in 2019 made money — don’t think you’re smarter than you are.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. :-)

That’s a big question. We all have become intolerant of people with whom we disagree. Instead of acceptance of a different point of view, many attack and demean those who take the other side. Look at many universities today — which should be a haven for freedom of thought — that forbid speakers for having a different opinion. There are few absolutes in life, accept the fact not everyone thinks like you do.

Thank you for the interview. We wish you continued success!

Authority Magazine

Leadership Lessons from Authorities in Business, Film…

Authority Magazine

Leadership Lessons from Authorities in Business, Pop Culture, Wellness, Social Impact, and Tech. We use interviews to draw out stories that are both empowering and actionable.

Jason Hartman

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Author | Speaker | Financial Guru | Podcast Rockstar

Authority Magazine

Leadership Lessons from Authorities in Business, Pop Culture, Wellness, Social Impact, and Tech. We use interviews to draw out stories that are both empowering and actionable.

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