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A Fundamental, Disciplined Investment Process

Are your investments designed to “beat the markets”? To outperform an index?

Or are they designed to achieve your goals in life, to realize your vision?

The two questions are not rhetorical. They make all the difference in the world. Unfortunately, our industry has successfully convinced investors that the primary goal should be the former. Most financial advisors skillfully distract investors from the truth; that every investor has a specific required rate of return they must achieve on their portfolio, every year, in order to accomplish their goals in life. An investor’s required rate of return is based on:

  • Where the investor is currently positioned in terms of savings.
  • How much the investor can and is willing (not necessarily the same thing) to consistently save over time.
  • The financial requirements associated with the investor’s stated goals in life.
  • The investor’s time horizon.
  • The investor’s risk tolerance. Some investors will choose to invest more conservatively if it means they can sleep better at night, even if it means revising their goals in life, and the financial requirements necessary to meet those goals.

Investors intuitively know that their primary focus should be on the absolute rate of return of their portfolio.

How do we know? Because we often get the following questions:

  • The ups and downs of the stock market don’t make sense to me. It’s stressful, and I’ve lost sleep because of it. How do I find the peace of mind that will allow me to sleep well every night?
  • My advisor’s performance hasn’t been all that good. He/she seems to be making emotional decisions, and doesn’t have a clear explanation or basis for them. Can I work with an investment professional that has a proven track record of sufficient returns in both up and down markets? One that is based on a well-grounded and repeatable process?
  • I’ve been managing my family’s investments, and while I’ve had good years, despite my best intentions, I’ve also made some mistakes. I’m tired of having to do it, and would rather spend the time doing other things. Can I free up my time to do other things and improve my chances of accomplishing my goals, without feeling like I’m giving up control of my assets?

All of the above questions highlight a critical, but unspoken fact about today’s investment world.

 The vast majority of financial advisors speculate, they don’t invest.

What’s the difference? The degree to which risk is a focus. Speculation has very little focus on risk, while Investment weighs both the risk and return to determine the suitability of taking action. Risk and return are two sides of the same coin. Speculation only looks at the return side. Investment looks at the overall size of the coin, both the risk and return. To make our point, allow us to go back to the Crash of 1929.

Benjamin Graham, who, despite making more than $500,000 per year starting in 1919 (he worked on Wall Street starting at the age of 25), nearly lost all of his wealth in the Crash of 1929. After reflecting on that experience, he concluded that, in large part, financial market participants had lost sight of the differences between investment and speculation, and as a result, believed they were “investing” or “speculating” based solely on the results they achieved. If the results were poor, the strategy was labeled a speculation. If the results were positive, the strategy was labeled an investment.

He went on to write one of the classic books on investing, Security Analysis, in which he used the phrase to describe investors’ mentality:

“… an investment is a successful speculation, and a speculation is an unsuccessful investment.”

Mr. Graham devoted an entire chapter to define and differentiate between speculation and investment, arguing that speculation or investment was not defined by its success or failure, but rather by the process through which economic gain was pursued.

As such, he advocated a fundamentally based investment approach, predicated on the philosophy that stocks should not be viewed as numbers that go up or down depending on the mood of Mr. Market, but rather, as an efficient mechanism to facilitate resource diversification and business ownership. In other words, a means for an individual to become an equity owner in a business, and in so doing, diversify his/her assets into other, attractive industries and companies.

How did he do after coming to his senses? He never lost money again for his clients until he retired in 1956, a 22 year period in which he averaged 17% annual returns.

The truth is, investing is about risk and reward.

Investing is about business ownership.

It’s why we use individual stocks and bonds in our client portfolios. It’s why we spend a considerable amount of time studying the business itself before we develop an opinion about the investment merits of the stock, and why we don’t use mutual funds or index funds. We employ a proven, well-grounded, highly repeatable process that ultimately delivers success on the key front – achieving the required rate of return our clients need in order to achieve their goals, and realize their vision, on an after-tax, after-inflation, after-fees basis.

If you want to learn more about our investment management process, find yourself asking any of the above questions, or have your own questions and would like answers, we encourage you to contact us only to answer your questions, not to sell you our services.