The first major investing lesson learned by Joseph Michaletz occurred during the stock market crash of October 1987 when the value of his personal portfolio shrank 34 percent in just two days. Like millions of other investors, Michaletz panicked and unloaded his shares thinking it was the prudent thing to do under the dire circumstances triggered by what is known to this day as Black Monday. Ten weeks later he realized that, if he had not lost his nerve and sold his holdings, the full value of his pre-crash stock portfolio would have been restored by a market rally.

“I was part of the herd mentality. I was fear stricken,” Michaletz acknowledges. “It was the first real big bear market I had ever experienced. I was just kicking myself for being so stupid. I went on a mission to find out who had bought my stocks and what did they know that I didn’t know?”

Michaletz started talking to money managers, even contacting and having a couple of conversations with Peter Lynch, who was managing the Fidelity Magellan Fund, the world’s largest mutual fund at the time. Along the way it became clear to Michaletz that other investors had been buying his stock at a sale price, taking advantage of less experienced investors’ fear, an emotion some claim is twice as powerful as the greed.

Having learned some hard lessons, Michaletz never again panicked during market crashes and downturns, now considering them buying opportunities, and he diversified his portfolio to real assets, such as real estate, to reduce volatility and create tax efficiency, among other reasons.

FATHER’S ADVICE, TIMES FIVE

Michaletz’s father, a banker and insurance broker, told his son early in life that he would never have to worry about retirement if he lived on 90 percent of what he earned and invested the remaining 10 percent. Michaletz took his dad’s advice magnitudes beyond, living on just half of what he earned and investing the balance.

“I still do that to this day,” he says. “It is one of my core disciplines.”

The practice paid off handsomely. By age 38 Michaletz could have comfortably retired, though he continues to work because providing financial planning and advice is his “true purpose” in life.

That understanding was not always the case. His post-secondary education began at Vermillion Community College in the small northern Minnesota town of Ely to study forestry and wildlife, with vague notions of a career among the flora and fauna as, perhaps, a game warden, wildlife biologist, forest ranger or something in parks and recreation. Michaletz was only one year into that curriculum when he had an experience that set him on a new course for the rest of his life.

“I basically had a vision that made it very clear what I was supposed to do with my life, what my real purpose was,” he recalls. “I don’t mean to sound corny, but I was praying about it, and that night I had this vision that laid out in front of me what I was supposed to be doing, and it was just spot on. It answered every question I had.”

Based on that experience, Michaletz returned to Mankato and enrolled at the local campus of Minnesota State University, from which he graduated with honors with a finance degree and minors in real estate, investments and insurance. While still studying at Minnesota State, he started an investment club with his finance professor.

“We would pick stocks and compare their performance on a weekly basis,” he explains. “It was just he and I, there was nobody else in our group, and I learned a lot. I got pretty good at it and was very competitive.”

A TELLTALE MOVE

Michaletz’s parents moved him out to the country when he was in third grade, giving him the space and freedom to discover a passion for nature and the outdoors and, eventually, hunting and fishing along the Minnesota River. In particular, he liked hunting duck and fishing for crappies and walleyes. Over the years, Michaletz has gone on large-game hunting trips around North America, including moose and brown bear in Alaska and will hunt stone sheep next year in British Columbia.  In addition to shotguns and rifles, Michaletz became an avid archer.  He calls archery a primitive and more challenging form of hunting, noting that it is far more difficult to take down an animal with a bow and arrow than a rifle.

He considers the outdoors in general to be a personal and spiritual place.

“I can sit up in a deer stand all day long and never get bored,” he says. “I am very attuned to nature and my surroundings and like to fit in and observe nature.  I have seen all kinds of things that most people have never seen in nature. It is just awesome.”

He and wife Christine, who is the firm’s COO, acquired 1,400 acres of timberland in northern Minnesota they manage for wildlife and timber, making annual improvements to support the wildlife and other habitat. They also consider it a refuge.

“If I had to rank it among all the personal investments that my wife and I have, it would be my worst investment,” he says. “But I don’t need to make money on this property. We harvest timber and have four rental homes on the property, so it pretty much pays for itself as far as covering the property taxes and the improvements we make.”

BEGINNINGS

Early in his career, Michaletz started providing estate planning services to farmers and ranchers, producing estate planning seminars and building his confidence.

“I really wanted to help these farmers with farm succession planning. Most of them had no succession plans at all.”

He would meet with estate planning attorneys, buy them lunch and identify the best of the bunch, sometimes inviting them to speak at his seminars. By his final year of doing seminars, around 1995, Michaletz says he had an 80 percent appointment rate and was booked solid for six months, including weekends — good enough to turn him into one of the top producing of the 60,000 agents connected with Transamerica Occidental Life Insurance, booking 40 to 50 policies per month. Michaletz’s career was off and running.

As his experience broadened, Michaletz became an advocate of diversification.

“My definition is broader than most people,” he says. “Diversification for me includes, obviously, diversification within multiple asset classes, but also between paper assets and hard assets. Going back quite a few years, I started investing in real estate. Real estate is a really good asset class. There are a lot of characteristics about real estate that are good, and if you sacrifice liquidity, you will more often than not be rewarded long term with more stable growth.”

All real estate investments approved by Discipline Advisors that utilize debt are required to have a debt-service coverage ratio of at least 200 percent, which Michaletz says gives it the ability to meet cash-flow obligations on, for example, an apartment or multifamily complex with occupancy of only 55 percent.

Michaletz is a fan of hard assets, and none more than real estate, which he calls a stable, predictable asset class that offers significant tax efficiency. Discipline Advisors has had more than 70 liquidity events involving its real estate investments with an average internal rate of return of about 12 percent.

“That is pretty darn good for a relatively stable, low-risk asset class,” he remarks. “We are treated as direct investors, the depreciation schedule applies to us based on our pro-rata ownership interests, so you can generate cash-on-cash returns that are going to average anywhere from 5 percent to 9 percent annualized, which are typically 100 percent tax sheltered.”

When there is a liquidity event — four to five years later, on average — the investor has the option of paying capital gains taxes on the proceeds and recapture depreciation, or deferring the tax liability by using the tax code’s 1031 exchange provision and rolling the proceeds into another real estate investment, something that cannot be done with a nonqualified stock portfolio.

“As I look at my lifetime of investing, I have not only averaged better returns with less volatility and risk in real estate, but there is no comparison to real estate’s tax efficiency,” he observes.

GAINING ALTITUDE

Going above and beyond on behalf of clients is a platitude among RIA executives, but Michaletz takes the phrase literally, piloting his own aircraft — a twin turboprop pressurized to 35,000 feet with a 2,000-mile range and a cruising speed of 350 miles per hour — which he flies around the country to meet with existing and prospective clients. It seems to run in the blood. Michaletz’s grandfather was a pilot, flying a Piper Super Cub for recreation, and his father flew B-29 bombers during the Korean War, later co-owning a single-engine Beechcraft Bonanza with a friend.

“Flying was always something I wanted to do, but I couldn’t justify the expense of it,” he says. “But Jan. 1, 1999, I made the commitment. We live an-hour-and-a-half drive from Minneapolis/St. Paul International Airport, so to go anywhere commercially we had to leave two-and-a-half hours before the flight and it was very inefficient, and I did not enjoy flying commercial.”

Michaletz got his pilot’s license in 1999 and bought his first aircraft in April of that year.

“That really opened up our horizons. I fly to multiple meetings a week.”

Michaletz says he will not engage a client without a face-to-face meeting and is given an opportunity to ask the “hard questions.” To wit: What are your core values about wealth? Do you have any unresolved issues about your estate that keep you up at night? Do you feel your children are capable of wisely managing their future inheritance? How do you think your children will view their future inheritance — as a winning lottery ticket or as an opportunity to honor a legacy? What is your view on estate taxes? How do you feel about paying taxes versus social or charitable giving? Have you considered utilizing a family foundation to perpetuate your wealth and teach your children the values gained from giving to those less fortunate?

The Discipline Advisors’ clientele is dominated by ranchers and self-made entrepreneurs who have created wealth through businesses, private equity and real estate investment. They typically have a net worth of $10 million to $20 million, though Discipline Advisors also has clients worth more than $100 million, as well as one billionaire among its clientele.

Then there are the advisers Michaletz hires.

“One of the common characteristics that all of our staff have — and this is a thing we look for when we are hiring people — is they instinctively have a sense of urgency to serve other people.”

That emphasis has resulted in a steady stream of client referrals to the firm — too many to handle, Michaletz says, which is why plans are afoot to hire additional advisers. With any luck, Michaletz will be able to find advisers who, like him, are advisers and investors by nature.

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter
@mikeconsol to read his latest postings.