Month: November 2019

Where Did All The Risks Go?

© Can Stock Photo / Hmelevskih

In what seems like the good old days, we thought about many kinds of risk. Now, to many, risk only means one thing. All the other kinds of risk seem to have disappeared. Here are some of the classic risks as we learned them long ago, and still understand today:

Market Risk. Changes in equity prices or interest rates or currency exchange rates that hurt the investment value.

Liquidity Risk. Being unable to sell an investment without a discount for lack of buyers.

Concentration Risk. Having all your eggs in one basket, when the basket gets upset.

Credit Risk. A bond issuer might not be able to pay you back because of adverse conditions.

Inflation Risk. A loss of purchasing power over time because investments fail to keep up with a rising cost of living.

This old-fashioned approach to risk focused on possibilities for what might happen in the future. This makes sense to us, since the future is where we will get all of our coming investment results, good and bad. The past is past.

But perhaps the most popular approach to risk today is based totally on the past, not the future. Past volatility is supposedly the measure of risk in any investment and every portfolio. Modern Portfolio Theory (MPT) implicitly assumes that past volatility is the sole measure of risk. Yet volatility is inherent in any form of long-term investing, and has little to do with many of the classic forms of risk.

Investment firms and advisors promoting ‘risk analytics’ and many measures of ‘risk tolerance’ are using this backward-looking theory of risk. It has nothing to do with the classic definitions of risk, outlined above. In our opinion, some of the latest and greatest risk management technology is not focused on actual risk at all, and could discourage people from enduring the volatility required to achieve long term results.

Meanwhile, the classic understanding of risk has us thinking about its many dimensions as we choose securities and build portfolios. One drawback of our approach? It takes more work to do things the old-fashioned way. But we think it is the right way to go. No guarantees, of course.

Clients, if you would like to talk about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Richard R. Berner, In Memoriam

berner

My old friend Dick Berner passed away recently, at the age of 89. Although afflicted with chronic and serious conditions, he was making plans to get out of bed and start taking care of business again, all the way to the end. When not totally lucid from the effects of pain medication, he spoke about working on imaginary deals.

Dick was an early mentor. He hired me to come to Louisville when I was just 22 and living near where I grew up in the middle of Omaha. He taught me more about working with people in a few days than I had learned in 18 months as a life insurance agent.

He would have been about 48 when we met, and was operating an insurance agency, a savings company, a bulk oil distributor, an auto parts store, and a fledgling new vehicle dealership. Just a few years prior, he got out of a more established dealership. (It operates on a much larger scale today in the hands of his son-in-law and daughter, forty years later.)

Within a few years of meeting, he started developing acreages and homesites, and got his real estate license. For most of the last thirty years, real estate was his primary business.

Dick was tireless in business, endlessly working on new ideas, always thinking. And he nearly lived out my long-held ambition of working to age 92.

Perhaps because he had always figured things out and was not afraid of new ideas, he challenged me with new things all the time. I got a business education right on Main Street in Louisville that was priceless. It has served me well ever since.

Life is filled with joy and pain. The mortality rate, being 100%, is a source of some of that pain. But the lives we lead tell a story. It fills me with joy that I got to be a small part of Dick’s story, and have him be such an important part of my story.

Rest in peace, old friend.

Free Lunch?

© Can Stock Photo / angelo

A few investment institutions, including those which maintain accounts for investment advisors, have gone to zero commissions on stock transactions. We are reminded of the old saying, “There is no such thing as a free lunch.” Of course, every ongoing business collects every dime of its costs from customers, one way or another.

We are reminded that the warmest apartment house on a cold day is the one where utilities are not separately metered. A resident might say “The rent is high, but the heat is free.” In truth, the landlord is getting the cost of the heat out of the tenants. And, more heat gets used because of the illusion that it is free.

Investors have benefited mightily from competition in financial services through the years. Lower costs and improved services and choice are good things. This latest step, however, looks to be a step backward. Some observers believe that zero-commission trading will lead to more trading, just like the apartment house that uses more heat.

We favor pricing mechanisms that have customers paying for the services they use. This is the fairest way to allocate the costs of anything. Nobody believes that maintaining the infrastructure and expertise to handle securities trading, account for it, and deliver services to the investor is free. Everybody knows those costs will be paid somehow.

As fundamental, long term value-oriented investors with relatively low turnover, we would hate to be subsidizing rapid-fire traders who benefit from zero commissions. Clients, we will be monitoring developments closely, seeking to maintain sound economics for your business and ours.

If you would like to talk about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Dumb as a Rock?

© Can Stock Photo / disorderly

Haven’t we all heard the insult ‘dumb as a rock’ at one time or another? We recently came to the conclusion that there is something worse.
Sometimes people fail to act as smart as a rock.

A rock never acts rashly when presented with an unexpected situation. Nor makes impulsive decisions based on fleeting feelings. Nor changes long term strategies because of short term conditions.

No rock ever wanted to sell all investments because of that Democrat or Republican that got elected. No rock wanted to jump on the latest fad in the markets.

Perhaps striving to be as smart as a rock fits in with one of the ideas that legendary investor Charlie Munger talks about. His notion is that it is a lot more valuable to not be stupid than it is to be smart. After all, smart people may make stupid mistakes.

Do not take this the wrong way. We believe in education. We read incessantly. We are always searching for perspectives or knowledge that might give us an edge. Brains are useful. But it helps to remember, as Munger said, to avoid being stupid.

One of the nuances of being human is the possibility that we can be two things at the same time. Generally kind people might be rude. Those who tend to be rough might be gentle. And smart people might do stupid things. When we analyze opportunities or think about financial decisions, we try to not be stupid.

Clients, if you would like to talk about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.