Warren Buffett Investments in 1957 (Letter to Shareholders)

Warren Buffett Letter to ShareholdersWarren Buffet had three partnerships in 1957. That year he outperformed the market with all three partnerships with 6.2%, 7.8%, and 25% for the year. The market in 1957 was down 8.470%, including dividends.

His position at Commonwealth Trust Co. of Union City of New Jersey that he called a “work-out,” accounted for 10% to 20% of the portfolio of various partnerships. This was an arbitrage position of a company expected to be acquired by a larger bank. He says, “Obviously, during any acquisition period, our primary interest is to have the stock do nothing or decline rather than advance.” Warren Buffett found a lot of value in acquisitions that he could predict.

In 1956, 30% of his portfolio was held in arbitrage positions, but he reduced it to 15% in 1957. In the back part of 1956, It was a decline in the stock market, and Warren took advantage of the low price to buy some securities.

In the newsletter, he acknowledges that he is most likely to do better in bear markets than in bull markets.

Download Warren Buffett letter to shareholders – 1957 here

Warren Buffett Investments in 1958 (Letter to Shareholders)

The size of the stock market in 1958 was very tiny when compared with today’s markets. The stock Commonwealth Trust Co. of Union City of New Jersey that he owned had just 300 stockholders, and it was transacted only twice a month. The bank was making good profits, but because it wasn’t paying dividends its was undervalued. Warren was expecting the bank to be acquired by a larger bank with a 25.5% stake in it, but the transaction was taking too long, and other investors that took note of the opportunity as well were causing the stock to rise.

Because of this, he decided to sell and focused on building positions where he had more control over the outcomes. Warren had very concentrated portfolios in 1957 and 1958. In 1958 one of his positions represented 25% of the assets he was managing through five different partnerships he had.

In 1958 the market was overvalued, and in years like this, Warren was expecting just to keep up with the market, not beat it. In some of the partnerships he did, in others not. The stock market that year was up 38.5%, and gains from Warren Buffet partnerships ranged from 36.7% and 46.2%.

Download Warren Buffet letter to shareholders 1958 here

Warren Buffett Investments in 1959 (Letter to Shareholders)

in 1959 Warren’s portfolio was very concentrated. One of his positions represented 35% of the entire portfolio, but in this case, it was an investment fund where he had majority ownership, and the company owned 30 or 40 of other stocks within.

Although the stock market was up 19.9% in 1959, Warren Buffet managed to beat it barely at 25.9% averaging the results of all his partnerships.

In 1959 Warren was investing the other 65% of his portfolio in stocks and work-outs (arbitrage positions) that he considered where shield from the behavior of the general market.

Download Warren Buffet letter to shareholders 1959 here

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Recently, Ray Dalio published a research study called the changing world order. In a nutshell, Ray Dalio believes that declining empires or superpowers decline for the same reasons. He summarized his findings and came up with a typical scenario of raise a fall that he called an archetype. Although the rise and fall of empires may be slightly different from case to case, they have more things in common than differences.

Ray Dalio identified three phases of an empire:

  • The ascent phase, characterized by the gaining of competitive advantages.
  • The top phase, characterized by sustaining the strength but eventually sowing the seeds for loosing the competitive advantages that were behind the ascent.
  • The decline phase, characterized by the self-reinforcing declines in all these strengths.

Ray Dalio identified 17 leading economic/social indicators (he called them measures of strength) that show when a superpower is rising or declining. From those 17 indicators, 8 seems to be the most relevant. The chart below shows how these 8 factors play out in any given rise and fall of a superpower, with most of the weight on the most recent three currency reserve countries (i.e., the US, the UK, and the Dutch).

When a superpower is at the top, its currency becomes the world’s reserve currency. Today is the Dollar of the United States, but before was the British Pound, and before that, the Dutch Guilder. Having one’s currency be a reserve gives that country greater borrowing and purchasing power.

In all cases, this power is abused as superpowers get comfortable, work less hard, engage in more leisurely and less productive activities, and especially spend more than they should. This behavior increases the debt of the superpower exponentially and makes it weak. This decline often coincides with the rise of a challenging superpower, following the conceptual diagram below. In these transitions, there is a big risk of revolutions, wars, and currency breakdown.

All this takes us to the graph below. When all the measures of strength are combined is easy to understand the decline of the Netherlands in the 1800s, and the UK in the 1900s. The United States is in sharp decline today, while China is rising at an unprecedented rate. At some point, this image suggests, a new world order may be unavoidable.

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Doubletree by Hilton Hotel in Paracas, Peru

Hotels will reduce its workforce

The current pandemic crisis, caused by Covid-19 will have lasting effects in the hotel industry worldwide. After this crisis, I don’t expect hotels to reincorporate all the people they had furloughed. There are a few reasons for this.

First of all, even after the crisis, occupancy will continue to suffer for the remainder of 2020 and probably well into 2021. The millions that had had been losing their jobs won’t have the disposable income necessary for traveling, lowering demand for an extended period of time. Weddings and family reunions would be postponed, as well as other social and corporate events. Urban hotels in areas where the outbreak has been significant, revenues per available room (RevPar) have dropped 81%, and nationally 69%,1 even when recovery is taking place, it is probably that some kind of travel restriction continues, which will diminish demand as well. If demand stays low, hotels won’t have the capacity to absorb the same size of labor force they had pre-crisis.

In addition, the longer the furloughs, the bigger the risk for hotel companies to lose qualified employees. Not many people in the United States can sustain three consecutive months without pay, and hospitality is not the exception. Many people in the industry may be forced to explore other job opportunities outside the field. Some may just voluntarily depart, even if they have the financial means to hold on, just because they may see the industry vulnerable and unpredictable.

Hotels will carefully evaluate any redundancy in their operations and will take this opportunity to make opportunistic changes. Operational departments would be consolidated, and many positions won’t be refilled. Large hotel groups and franchises would be able to operate with 20% or 30% less of its workforce in most cases.

Moving forward, hotel companies would be more aware of pandemic risks, and they may try to get a better handle on fixed costs. This means they will take a hard look at any position at the company and how they can optimize the resources at hand.

More hotel companies will jump into the “asset-light” wagon

Hotel companies had become more brands, not bricks. Both Marriott and Hilton, the two largest Hotel companies in the United States, are committed to an “asset-light” strategy; they both own very little real estate. According to Mark Wynne Smith, Global Head of JLL’s Valuation Advisory, many hotel brand companies have divested real estate to focus on operating hotels. 2

Even hotel brands that still have some real estate are divesting it quickly, but the current crisis will accelerate that process. Hotel companies that have more exposure to real estate are having more problems navigating this crisis because they have large outstanding mortgages and are responsible for far more people that maintain the regular operations at their properties. Although the government has offered some relief, hotels are facing many challenges accessing the resources that need, in the time they need them, and for the purpose they need them. 3

This extreme pain will cause brands to get rid as soon as possible of any real estate they still own. The latest major hotel brand to complete an asset-light roadmap was Accor, that completed the process in December last year with the disposal of Orbis, a 5.2% stake in Accorinvest, and a 5% stake in Huazhu.4Other major, medium, and small brands will follow suit.

The hotel industry will consolidate

On October 25th of 2019, Aimbridge Hospitality and Interstate Hotels & Resorts completed one of the biggest merges in the Hotel industry. The merge created a major hotel management company with 1,400 branded and independent properties in 49 states and 20 countries.5 It is not a secret that in Hospitality size matters, the same as companies such as Marriott or Hilton can negotiate better deals with online travel agencies, large management companies can negotiate better deals with hotel brands.

Better deals include many things, but the most important one is a significant reduction of associated fees. A management company with 1,400 properties have a different seat at the table that a management company that owns three or five branded hotels. Large management companies will also have better access to liquidity in times like the current one. Large companies can issue bonds, or leverage lobbyist to access government bailouts that would be difficult to access by small hotel operators. Large management companies can also leverage better deals with creditors because there won’t be any interest from anyone to let these companies go down.

This crisis will fuel this merging and acquisition trend, as many operators will look for opportunities to protect themselves against unforeseen events like this one, and will find better ways to leverage the economy of scale. Many small and medium operators won’t be able to sustain the crisis either, and they may become a target of large management companies with the cash and resources to navigate the crisis more successfully.

Automation adoption will increase in hotels

Like most crises, there’s always a silver lining. The current crisis is an opportunity for hotel brands to reinvent themselves and move forward with bold, untested ideas that had never been tested before. One of them is widely technology adoption.

Lately, major hotel brands had made important progress in technology adoption, such as digital room key and digital check-in. This technology allows people to check-in and check-out without even stopping by the lobby. In this crisis, this technology becomes highly relevant. As social distancing protocols are in place, the advantages of this technology is invaluable. Although Hilton and Marriott are pioneers of this technology, the crisis from Covid-19 may incentivize other hotel brands to do the same. This technology will not only protect hotel personnel from contagion but will also save money to hotels that may be able to operate with fewer people.

In the near future, the rollout of these technologies may take months, not years, as it has been the case so far. There are already some hotel brands that are ditching the front desk.6 Kiosks, check-in pedestals, tablets, or iPads are already replacing people at the front desk, and the current crisis will only speed up this process. Even properties that had been shy of trying robots may be willing to give it a second look. Hilton already piloted the use of a robot at the Hilton McLean in Virginia,7 and may continue experimenting after the crisis. Robots not only can be used in the lobby but to deliver room services to guests such as food and drinks. The coronavirus already increased the use of such robots in China exponentially, initially in hospitals, but we may see the same adoption levels in hotels moving forward.

Hotel brands will grow faster

In North America, 67% of hotels are branded, while 33% are not.8 Branded hotels are collectively organized, so they can easily reach out to the government for help, something that independent hotels will find very hard to do. Bridgewater estimates that the revenue drop in the travel and leisure industry in 2020 will top $199 billion for listed companies, and a whopping $920 billion for non-listed companies; this includes independent hotels, independent tour operators, independent travel agencies, etc.9 Large hotel brands, widely represented by the American Hotel & Lodging Association will find is relatively easy to tap into the bailout funds made available by the government through the Cares Act. But for small independent hoteliers, the story will be very different. Small operators don’t have the same representation, influence, or contacts to make their voice heard; in addition, small independent operators can run out of money a lot quicker. Banks can start tightening standards for new credit lines or recall revolving credits that were already issued due to market volatility. Additionally, small independent hotels will have a hard time negotiating more flexible terms with suppliers and vendors, something that big brands can do very easily by taking advantage of the economy of scale.

This painful experience from small independent hotels will cause a sudden interest to associate themselves with big brands. This will benefit extensively the biggest payers in the United States: Hilton and Marriott. Major brands will see a big interest spike from small independent hotels to become franchisees, so the numbers of conversions may skyrocket in 2021 and beyond. This couldn’t be happening at a better time when major brands already have multiple soft brands that can accommodate the integration of pretty much any kind of hotel in record time. After the covid-19 crisis, a significant growth for hotel brands will come from conversions of independent boutique hotels.

Business travel will face new challenges

Traditionally a big portion of the revenues in the hotel industry comes from the business travel segment, and that balance hasn’t changed in a long time. After the cover-19 crisis,10 this balance between business and leisure travelers may change.

Companies may start to push back on business travel because of the liability of employees getting sick. They may start encouraging virtual meetings and remote work, which may negatively impact the business travel segment moving forward. In addition, major corporate events, conferences, etc. may start to decline, which will negatively impact the meeting & events segment of the hotel industry. The corporate segment will see a decline, at least in the short term forcing major brands to rethink how they will attract more leisure travelers.

It is possible that both segments decline proportionally, maintaining the same balance that we have seen historically, but regardless of the distribution, corporate travel may have to be re-imagined. Business travel that has been the bread and butter of the hotel industry won’t be give it for granted after the crisis.

  1. https://www.hotelbusiness.com/report-recovery-depends-on-length-impact-of-covid-19/ ↩︎
  2. https://realassets.ipe.com/alternatives/hotels-brand-not-bricks/10015295.article ↩︎
  3. https://www.washingtonpost.com/business/2020/04/14/with-millions-unemployed-hotel-industry-lobbies-spend-stimulus-other-needs/ ↩︎
  4. https://press.accor.com/successful-completion-of-the-asset-light-roadmap/?lang=en ↩︎
  5. https://www.interstatehotels.com/2019/10/25/aimbridge-hospitality-and-interstate-hotels-resorts-complete-merger-today/ ↩︎
  6. http://www.nbcnews.com/id/39854018/ns/travel-business_travel/t/some-hotel-chains-ditching-front-desk/#.Xpc2Ay-z124 ↩︎
  7. https://newsroom.hilton.com/corporate/news/hilton-and-ibm-pilot-connie-the-worlds-first-watsonenabled-hotel-concierge ↩︎
  8. https://bit.ly/2RC3OJq ↩︎
  9. https://www.bridgewater.com/research-library/daily-observations/Greg-Jensen-the-coronavirus-4-trillion-hit-to-us-corporations/ ↩︎
  10. https://www.statista.com/statistics/207103/forecasted-number-of-domestic-trips-in-the-us/ ↩︎

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On This Crisis, You Are on Your Own

by admin on April 10, 2020

I lost my job this month, along with millions of people around the country, so far more than 16 million to be precise. And although a generous rescue package passed in congress and companies are willing to help, I still feel I’m on my own. This crisis hit me at the worst possible time, on February 14th, I was diagnosed with coronary artery disease, and had heart surgery on March 12th. On March 26th, and only two weeks after my surgery, I learned that I had been furloughed, along with thousands of employees in my company. In addition to my medical bills that eat a chunk of my safety net, now I have to deal with the incompetence of local and federal governments that had made it very difficult to near impossible to get any help in these difficult times.

Fortunately, I decided not to wait for that help, and I took matters on my own hands. On March 27th I created a gofundme campaign that is now 70% funded by family and friends. People that just like me, had been hit hard economically and psychologically during this crisis. In just two weeks, I had been able to raise twice as much as the government of Florida is willing to give me on unemployment benefits. Other than our friends and family, we are on our own; here is why.

Unemployment is near Impossible to collect.

First of all, even applying for unemployment has been a huge challenge, not only in Florida where I live but in many states around the country. This crisis has demonstrated how incompetent our governors are and how corruption still rampant at the local state level nationwide. Specifically, in Florida, the website was literally designed to fail. Governor at the time Rick Scott ordered the creation of this site, paying the astronomical amount of $77.9 million dollars. The goal was to make the site almost impossible to navigate to prevent people from applying and artificially making unemployment numbers look good. The site is so bad that Ron DeSantis, the current Florida governor made the decision of resorting to paper applications, perhaps relying on an army of people that they don’t have to process these requests for weeks if not months.

I tried to submit my application online for several days, but the site kept crashing, finally, I decided to apply at 2:30 AM in the morning, and, finally my application went through. I didn’t receive any confirmation by email or text message, so I just hope it is all fine. Logging in back to check the status of my application is as difficult as applying for unemployment for the first time. The site keeps crashing consistently, and despite the claims from DeSantis, very little improvement can be seen. There are literally thousands of people around the country whose full-time job now is to make sure their applications go through.

Many families in this crisis had been hit twice. I have friends that worked at Disney that will be furloughing employees starting April 19th, and a couple of them are married to dentists that suddenly found unemployed themselves; this is one of the occupational groups with the most risk of contagion.

The IRS promised $1,200 emergency assistance checks that probably won’t arrive on time, when people need it the most, although checks started to be issued yesterday, some Americans won’t receive them until September. The government also promised an additional $600 per week to complement unemployment benefits, but there is no clear direction on how those funds would be channeled and when. At the moment, the government is relying on the deficient unemployment filing infrastructure of this country, which basically means that the prospects looked very grim. Most of these systems were made to handle less than 25,000 people at the time, where unemployment was around 3%, not 150,000 or 250,000 applicants at the same time, which is the case now. If people are not able to apply at the state level, those additional $600 per week for three months would not be issued either.

The government initiative is so flawed that they didn’t even account for the cost of living when allocating these funds. $600 per week in South Carolina may seem like a lot, but in San Francisco is probably a couple of visits to the supermarket, if not just one.

The website in Florida is so deficient that it doesn’t even list furloughed as an option when explaining the reasons for applying for unemployment, and this is the state that gets slammed every couple of years by major hurricanes and devastating floods. Didn’t they contemplate furloughed as an option? In my application, I had to select layoff, which was the closest reason I found it to furlough. Now I’m worried that my application would be rejected just because of that, I wouldn’t be surprised.

To make things even more complicated, because I’m furloughed, my employer stills paying me 20% of my salary; that amount is more than $275 per week, which disqualifies me automatically from filing for unemployment in the state of Florida. This means that potentially I won’t be receiving Florida unemployment or the $600 per week promised by the government. An absurdity that makes very little sense to me and puts me in a precarious situation.

At this point, I’m not sure I’ll get the promised checks of $1,200, not sure if I’ll get unemployment benefits, and not sure if I’ll be getting the $600 per week for 12 weeks. Everything is up in the air. In the meantime, mortgage payments, schools, and bills keep coming.

I should be able to withdraw my 401K without penalties but I can’t

Part of the coronavirus stimulus package contemplates a raised of 401(k) distributions of up to $100,000 without penalties. But one thing is what the bill says and another one completely different what is happening on the street. Although these provisions are contemplated in the bill, at this moment, my 401(k) administrator still claiming that they haven’t received any direction or guidelines from the government or my employer on how to proceed with this. Apparently, my employer needs to approve the changes before they even start implementing changes in their own systems. If I want to withdraw money today from my 401(k) I’ll be charged the same penalty I would have been charged before the crisis, even though that would be against the law.

So, in addition to not being able to claim my unemployment benefits, my 401(k) money is trapped until further notice. I had called several times my 401(k) administrator, and their answer hasn’t changed. My assumption is that this will take weeks to resolve, perhaps when my furlough is over or when I no longer need the money.

According to bank, rate only 41% of US households would be able to pay $1,000 for an emergency from savings, the other 59% may have to resort to credit cards, family and friends, personal loans, or something else. It is clear that the economic impact of this crisis goes way beyond a one-time charge of $1,000 dollars. If families’ income suddenly stop, education, food, and shelter can add three times that easily. 401(k) should be the last resort to get cash during this crisis, but many people may be forced to tap into it, especially when unemployment benefits are so dysfunctional and hard to get. Unfortunately, that’s an option we don’t even have available at the moment.

Forbearance is a trap

Another prevision of the coronavirus stimulus package is the ability to suspend mortgage payments for up to a year or less if you are not one of the lucky ones in which mortgage is federally-backed. Unfortunately, this initiative could be as flawed as the unemployment benefits and the 401(k) withdrawals. First of all, forbearance doesn’t mean forgiveness, and if you are not careful, you may end up in a worst situation than the one you are in right now.

Similar to the websites and call centers of unemployment benefits programs looking for mortgage assistance had skyrocketed, leading to longer wait times to speak with a representative. Forbearance requests grew by 1,896% between March 16 and March 30, and before that increased 1,270% between March 2 and March 16.

Even though my loan was purchased by Freddie Mac on September 12, 2016, when I called my bank, I found out that the “help” I was offered was only a foolish trap that will only put me in a worst situation three months from today. This is how the forbearance works according to 53 bank. I can stop the payments today, but only for three months, this is very different from what the government stipulates of up to 12 months. But the worst part is that after these three months, I should come up with a balloon sum, including all the missing payments plus interests. It shouldn’t be implied that if I’m applying for forbearance, I don’t have the money to pay now or three months from now?

My furlough goes through June 30th, which means that it is very unlikely that I’ll come up with a balloon sum at the end of the forbearance. In addition, although the government doesn’t allow loan servicers to report these late payments to credit rating agencies, I’m not so sure about that, the financial industry persuaded congress to reject a moratorium on recording missed and late payments on credit reports during the coronavirus outbreak, raising concerns that people who lose their jobs will take a lasting hit to their credit scores. In addition, the legislation has prevented credit bureaus from reporting negative credit information for four months, but my concern is that if I delay my mortgage payments for a year, will I start being reported four months from today?

Despite the forbearance terms being so irrational, it seems that it is not even worth to try, not only I would be very unlikely to come up with this balloon sum after three months, but also, I’ll put my credit score at risk.

So, with no unemployment benefits, not 401(k) withdrawals and no mortgage forbearance. I thank God that I have friends and family that, despite their own challenges, were very kind to support me and my family and help me navigate through these difficult times. We are on our own.

 

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The ground zero of this crisis is indeed the leisure and travel industry, but not all leisure and travel companies will navigate this crisis in the same way. Most likely, publicly traded companies will get government aid first, and non-listed companies will get help later if any at all. This is an unintended consequence of how the hotel industry is structured in the United States. According to Smith Travel Research (Smith Travel Research, 2015) in North America, 67% of hotels are branded, while 33% are not. Branded hotels are collectively organized, so they can easily reach out to the government for help, something that independent hotels will find very hard to do. Bridgewater estimates that the revenue drop in the travel and leisure industry in 2020 will top $199 billion for listed companies, and a whopping $920 billion for non-listed companies; this includes independent hotels, independent tour operators, independent travel agencies, etc. (Jensen et al., 2020). It is very unlikely that the financial resources from a  government bailout will make it to these companies, in the same way, they will make it to listed publicly traded companies such as Hilton or Marriott; unfortunately, the funneling channels that allow these operations are limited, and the institutional representation of these companies in front of the government is very weak, if non-existing. This situation will delay or prevent these companies from accessing bailout resources, at least initially, and at the exact moment when they need it the most. 

Companies like Hilton are very likely to receive financial help from the bailout first, but companies down the chain or in related industries may not have the same fortune. Bridgewater found that the financial system is less likely to crack as it did in 2008, even though they hold a third of the implied losses from the economy during this crisis. If the leisure and travel industry collapses, it will threat the financial system and will have immediate consequences in other economic sectors. One in eight non-farm jobs are supported by travel in the United States. A crisis in this sector will ripple through the whole economy in a variety of industries. At that point, the government will be forced to either expand the scope of the bailout o let some of these companies go bankruptcy. 

After the crisis, Hilton and Marriott would emerge as big winners, while independent hotels would be the brink of collapse or financially stressed. Hilton and Marriott will see a flow of independent hotels looking to join established brands and minimize the downsize in situations like this. If there is something certain is that after this crisis, not all hotel companies will emerge as they were, undoubtedly the big winner after everything is set and done would be mostly Hilton.

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Danger Ahead! A must see advice from Carl Icahn

by admin on February 29, 2016

In this video, one of the most successful investors in the world: Carl Icahn speaks about the great danger we are facing ahead. Carl Icahn speaks about the carried interest loophole, the problem of repatriation and inversions and how these problems don’t get fixed in Washington.

He also speaks about companies engineering their finances. Companies today artificially inflate their earnings through mergers and acquisitions and stock buybacks. Finally, he speaks about the two biggest problems of all: Introduction of permanent low-interest rates by the Fed, and oversell of high bond yields to the public, especially by BlackRock.

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Is Expedia spending too fast, too much?

May 10, 2015

Unquestionably, Expedia Stock is a great business and for that reason one of the top positions in my portfolio. Lately however, I have been seeing that the company is spending too much too fast on marketing and acquisitions, betting heavily on a future that looks bright on paper, but has yet to be proven. While […]

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Why I won’t sell Google GOOG in the next 10 years

April 14, 2015

I recently watched a recording of a brainstorm session with Steve Jobs and his ‘Next Incorporated” 11 team members back in 1985. It is an incredible 20 min episode highlighting some of the characteristics we all already knew about one of the greatest entrepreneurs of our era.  In the video, Steve Jobs said this to […]

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Another great lesson of Warren Buffett

March 10, 2015

Warren Buffett is by far the greatest investor of all time. His way of thinking, perseverance, and tough negotiation skills are all qualities that set him apart from everybody else. As Warren Buffet’s prepares to retire (he is already 84 years old), he continues to give investors, (and frankly all of us) incredibly valuable lessons […]

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Improvement in the travel sector may signal economic recovery and new opportunities

February 10, 2015

The global economy is a complex machine, the result of many small transactions that take place in different markets and sectors. When a particular sector is down, another may be up, and vice versa. Money moves around as things change, and in our world, change is a constant. When changes are taking place, opportunities abound. […]

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