diversification

If You Always Do What Everybody Else Does…

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Our clients know we are not like most other financial advisors. We used to be content to let people discover the differences at their own pace, if ever. But changes in the world have made clarity about the distinction a crucial matter—vital for us, vital for you.

The financial industry is responding to regulatory and competitive pressures by adopting standardized approaches for all investors. This ‘safe’ approach based on conventional thinking supposedly reduces risk of fines or litigation.

Consequently, many advisors spend no time reading SEC filings or analyzing financial statements or managing portfolios of stocks and bonds. Instead, they try to find people to stuff into one of three or five pie charts filled with packaged products.

There are more than 300 million people in the country. We do not believe you all fit into one of these pie charts.

Our principles-based approach is based on building custom portfolios for each client. We are contrarian—we do NOT want to do what everybody else does, and get what everybody else gets. We hope this is why you continue to do business with us.

With different methods, we get different outcomes. Client results generally do not match “benchmark” returns such as the S&P 500 Index, or what the pie chart would have gotten you. Sometimes we do better, sometimes we do worse, and over the long term we hope to come out ahead. No guarantees, of course.

Our portfolios also experience volatility. We all understand that this is an integral part of long term investing. We do not sell out just because the price goes down. Warren Buffett loves to buy when the price of a good opportunity declines, and so do we.

Since each client has a custom portfolio, there is a range of returns even among clients with similar objectives. We are constantly improving our portfolio process hoping that all clients receive as much benefit as possible from the opportunities we identify. But with our approach to portfolio-building, there are still nearly infinite variations in holdings. Money comes in at different times, and client preferences are taken into account when investing. Naturally outcomes differ one from the next.

Bottom line: if you want the benchmark return, or to end up with what everybody else gets, or to avoid volatility, you should find an advisor to slot you into a pie chart. Don’t worry, it is easy to find one—they are all over the place.

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

A 1-2-3 Approach to Investing

© Can Stock Photo / dexns

At times we feel embarrassed to be learning so much at a mature age. But we are grateful for the energy to attempt to improve what we are doing. Here we discuss developments in our portfolio management theory and practice.

One. Recently we figured out that one of our investment themes may benefit from a 1% position in a more speculative holding than we usually want to own. (By that we mean that 1% of a client portfolio could be invested in this company.) While failure could cost a dollar per dollar invested, success might return multiple dollars back, in our opinion.

We believe this makes sense because success might come at the expense of our other holdings. So one investment may serve to offset losses in another. No guarantees, of course.

We also realized that the 1% idea might help us in another way. Value investors have trouble buying exciting growth companies that have yet to develop large earnings, or dividends, or book value. But taking a smaller position in companies with solid prospects for growth can more easily be justified than buying a more sizable position. Perhaps this will let us participate with more comfort in the ownership of faster-growing companies.

Two. The next portfolio development came from our research into the biotech industry. The biopharmaceuticals each have their own specialties, and new products in various stages of development. Based on current earnings and prospects for growth, we wanted to gain exposure. It was too difficult to choose one over another, even among the larger and established companies. So we decided to buy 2% positions in each of four large players.

Three. We reduced our core position size from 5% to 3% for mainstream holdings. After 2015 we became interested in avoiding excessive portfolio volatility. Owning smaller pieces of more companies lets us be more diversified. We will also have more flexibility to let potential successful companies grow into larger fractions of the portfolio over time.

We are excited about the evolution in our thinking about the best ways to put portfolios together. Combined with the development of our trading protocols, we hope to put money to work faster than ever before—and in new ways. We still research carefully and come to conclusions only after thought and study, of course.

If you have questions or comments about how your portfolio is affected, or any other question we might help you with, please call or write.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

The Benefit of Being Picky

© Can Stock Photo Inc. / Farina5000

Suppose you had the opportunity to attend a fancy catered gala. When you get to the dessert table, a dizzying array of delicious looking pies are spread out for you to sample, too many to choose from. Not knowing which ones might be the best, a fellow next to you tells you he’s going to sample a little bit of everything and offers to help load up your plate the same way.

If you happen to be deathly allergic to peanuts, you would ask your helpful friend to skip the peanut butter pie and just get you some of the rest.
“Nonsense,” he tells you. “You never know, the peanut butter pie might be the best of the lot.”

“But if I eat it I’ll go into shock and might die. I can’t even let it touch the rest of the dessert on my plate.”

“You don’t know the future. Just because you’ve had an allergic reaction before doesn’t mean that you’ll have one now,” he says, handing you a plate with a slice of peanut butter pie smack in the middle. Instead of getting to enjoy your dessert you’re left unhappily trying to pick around the edges of the uncontaminated slices of pie.

This situation sounds absurd, and it is. And yet it resembles a commonplace practice within the investment industry. There is a portfolio strategy known as asset allocation that says that since we can’t know for sure which assets are going to go up or down, investors should aim to own a slice of everything. Because different asset classes move in response to different economic pressures, when one goes down it will hopefully be balanced out by a different asset going up. The goal is to try to reduce volatility through diversification.

However, just like our unhappy party-goer in the example above, there are probably some slices you don’t want any of—period. Tech stocks during the dot-com bubble in 2000 and mortgage based securities during the real estate bubble of 2007 were two slices of the investment universe that were very dangerous to your financial health.

Proponents of asset allocation dismiss this notion as market timing, saying that you can’t predict when the bubble will burst and that you miss out on potential gains by staying out of the bubble. But if we’re allergic to the pie, we don’t care how delicious the pie might be—we don’t want a slice.

Our approach may or may not be the right one. Nevertheless, we believe that being picky about the slices we take may bring us better results than blindly grabbing a bit of everything. If you want to talk about how this may apply to your portfolio, please call or email us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss.