investment strategy

Why Not Both?

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We keep reading a curious idea promoted by some in the financial industry. It goes like this: “Managing investor behavior is the key task for advisors, not managing investments.”

That framework assumes there is a choice between one or the other. There are two flaws in the assumption. It does not have to be an either-or deal. And some fraction of people don’t require babysitters for their natural investment behavior, which is effective.

We believe in BOTH of these roles. It may be true that raw human nature is generally counterproductive to sound investing. (Behavioral economists tend to think so.) Our theory and experience says that the attitudes and behavior of individuals can be deliberately shaped to their benefit—and ours.

What may apply as a general principle to all people does not necessarily apply to you as an individual. You have free will. And we believe people can learn.

So we spend a great deal of time and effort talking to you, and communicating about the mindsets and strategies and tactics we believe are effective. But that is only part of the job.

Legendary investor Charlie Munger said, “We wouldn’t be so rich if other people weren’t wrong so often.” By avoiding stampedes in the market, we may sidestep a poor situation that others are getting into. And by seeking the best bargains, we are looking for holdings that others may be wrong about.

In other words, two of our fundamental principles about investment management are founded in a belief that investment selection matters because people are often wrong. We see investor behavior as a creator of opportunities for our clients—not a problem to be managed. Clients, we keep saying you are special: this is why. We believe your investment behavior is exemplary.

Knowing what you own and why you own it, operating in accordance with sound principles and strategy, makes it easier to behave effectively. These things reinforce each other.

Manage behavior, or manage investments? It isn’t either-or—we need to pay attention to both. Clients, if you would like to discuss this at greater length, please email us or call.


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

A Tale of Two Theories

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Psychologists have a strategy to help cope with anxiety called the “dual model strategy.” It works like this:

You have a concern about some imminent disaster, which you believe is the source of many troubles for you. This is “Theory A.”

The alternative is that your concerns may actually be unfounded, but your fears themselves are creating your troubles instead. This is “Theory B.”

When it comes to investing, Theory A probably sounds like this: “The problem is that the economy will crash and I will lose money.” Theory B would then read: “The problem is that I worry that the economy will crash.”

If Theory A is correct, the proper plan is to pull your investments out of the market and put your money someplace safe. But there are two problems. First, we’ll never know if Theory A is correct until it is too late. Second, the economy and the markets have eventually recovered from every previous downturn. If you act on Theory A, there’s a good chance you may end up hurting yourself by acting at the wrong time. But Theory B—the idea that your worries are the real problem—is something that we can always work on.

The question is, how do you cope with your anxieties about the market? Perspective is important. Most of us are in this for the long haul, and are counting on our investment basket to provide for us for years and decades to come. Watching the market slide may be nerve wracking—but if you look back over the years, the speed bumps are barely noticeable.

Even so, it is easier to say “stick with the long term plan” than it is to live through short term bumps. There are some practical steps you can take to help cope with your market anxieties, too. Make sure you keep a cash reserve for emergencies: your investment portfolio is not a replacement for money in the bank. Also, as you reach the point in your life when you start to rely on investment income, it’s important to understand where your income is coming from. Even if you fear a downturn in the markets, it may not necessarily affect the ability of your income investments to generate cashflow for you to live on.

The key in all of this is to come up with an investment strategy that you’re comfortable with. If you continually change tactics every time you get nervous you may hurt yourself financially. If you need help coming to terms with your investment worries, please call or email us to talk them out.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

New Balance for Your Portfolio

Our recent article about finding your strategy provoked interesting conversations. We quickly saw a new framework for investors to reconcile competing needs and desires. This article puts context around the three central tradeoffs investors face.

Current Income or Long Term Growth?

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Fortunately, there are investments and strategies that offer the opportunity for long term growth while providing current income. Dividend-paying blue chip stocks are the best example. While suitable as part of an appropriate portfolio for many people, growth with income investments do not provide stability of market value, part of the next tradeoff.

Stable Value or Long Term Growth?

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While most people might prefer stability AND growth, it isn’t possible to have all of both. The best we can do is some of each. We ceaselessly seek to inoculate clients against fear of downturns, which are an inherent part of long-term investing. Behavioral Economics suggests that the price of stability is too high And yet most people need some ‘money in the bank’ or stable value holdings. They serve as emergency funds and also build confidence in your investments.

Stable Income or Stable Value?

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This may be the most under-utilized concept in the financial world. Investments that provide reliable recurring income fluctuate in value. And investments that deliver stable value do not provide reliable recurring income. Those now planning to retire have seen a vivid example in their lifetimes. Bank deposit interest rates have ranged from more than 1% per month at times to less than 1% per year at other times. In other words, the value was stable but the income was not.

The key concept here is that people living on their capital do not spend statement value to buy groceries or pay the electric bill. Portfolio income is the key to the monthly budget. Therefore, reliability of income could be more vital than stability of value.

Putting it All Together

We can do a better job of managing our goals when we understand that reliable income and long term growth provide opportunities that stable value holdings do not. Think about these ways to build a portfolio that you can live with:

  • Set aside an emergency fund so you are prepared for the unexpected.
  • Know where your income is coming from for the months and years ahead.
  • Plan for rising cost of living with a certain amount of growth potential.

These are major issues, requiring some thought and discussion. We are available; write or call to set an appointment when we can discuss your situation.


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.

Stock investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Poking Holes: Find Your Strategy

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“It’s easy to poke holes in every single investment philosophy or strategy. The trick is to find the one with flaws that you’re comfortable with.” –Ben Carlson, Ritholz Wealth Management

This concise statement makes it clear: every investor faces tradeoffs.

Current Income or Long Term Growth? Some strategies focus on growth in capital over time, others focus on current cash flow. Many investors need some of each. A pure growth portfolio probably won’t pay your bills, and a pure income portfolio may not have the growth to stay ahead of inflation.

Stability of market value or long term growth? This is where we live! We have written about the high price of stability. And we have constantly communicated in every way we know how about the link between long term returns and short term volatility. Everybody we know would prefer having both stable values day to day and wonderful long term returns.

You cannot have all of both—the best we can do is some of each. But it helps to resolve this tradeoff if you make sure your income and emergency funds are sufficient for your needs. If you own the orchard for the fruit crop, you don’t need to care what the neighbor would pay you for the orchard today.

Reliability of Income or Stability of market value? This dilemma is not even recognized by most people, and rarely discussed by investment professionals in our experience. Nevertheless it is a vital point. At one extreme, the kinds of investments that assure stable values have delivered wildly varying income over the years. In the early 1980s one could gain interest of 1% a month on money in the bank. More recently, it has been difficult to get 1% per year. So the person that retired on bank deposit interest of 12% saw a lot of volatility—and deterioration—in their income over time. Meanwhile, anything you can own that produces reliable income over extended periods will definitely fluctuate in market value, sometimes sharply.

Putting it all together: As you can see, every investment strategy has flaws. The trick, as Carlson says, is to find the one with flaws that you’re comfortable with. So we need to understand what is required in the way of stability, current income, reliability of income over time, and long term growth. We can build a portfolio that strives to balance those attributes with tradeoffs that are both acceptable and likely to be successful.

Please call if we may be of service in this regard, or to update our understanding of your situation.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

What Happened to my Account?

© Can Stock Photo Inc. / SergeyKuznecov

2015 has been a difficult year, investment-wise.

Most of us know how this works. We have periods where we laugh and laugh about how much money we’ve made, and other times where we want to cry and cry.

In addition to the ups and downs of the market, our accounts have spells where they behave differently than the broad market averages. Everyone has noticed the divergence this year.

So 2015 reminds us a lot of 1999, when the tech stock boom was in full swing. Midyear, we turned negative on large growth companies. But that was what everyone was buying. We preferred the bargains in “old economy” stocks like railroads and food companies and tractor makers. They went down and down while technology stocks went up and up. We seemed awfully stupid as our favorites ground lower month by month.

Of course, that all changed when the bubble burst. The high fliers ended up declining about 80% over the next two and a half years (the tech-heavy Nasdaq Composite index slid from a high of 5,408 in 2000 to a mere 1,108 in 2002), while the “old economy” stocks staged a good rally. In other words, we turned smart.

In trying to understand the carnage of 2015, one glaring fact stands out. All year long we have held the strong opinion that the best bargains in the market could be found in the natural resource sector. Companies that had anything to do with extracting minerals or oil from the ground started the year at amazingly depressed levels—bargain prices, in our view. Then they became cheaper. Then they became cheaper. Then they became cheaper. We seem awfully stupid, again!

We know how this works. At some point the gluts that have been so painful for many of our holdings will turn into shortages. Higher prices and growing revenues are the likely result. We’ve been through this with other holdings in the past, watching values getting chopped in half before tripling or quadrupling.

What we do takes patience. We never wanted 2015 to require so much of it, to require an explanation of performance divergences. But we believe the tide will turn, as it always seems to. Thank you for your business.


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

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

Why Life in the 21st Century is So Grand

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People know why financial advisors invest time and effort studying the economy, markets and specific opportunities. The case for commenting and writing and posting in the 21st century media may be less clear. But there is a compelling reason why we are so engaged, one that has to do with your financial wellbeing.

One of the biggest factors in investment outcomes is investor behavior. The average investor (and some advisors) behave in counterproductive ways. They tend to buy at high prices in times of euphoria and sell at low prices in times of general despair or panic. We believe our clients are far from average, however, and we would like to keep it that way.

Our theory is that more communication leads to understanding, understanding leads to effective behavior, which in turn usually results in better outcomes. We have no guarantees about the future, but we are pretty sure the wealthier our clients are, the better off we will be.

If we take time to write down one or two of our stories every week, we can post them for any client to read any time, 24/7, at their convenience. There aren’t enough hours in the day to tell a story a hundred times in a week, but a hundred people can read the story at the same time here in the 21st century.

More communication is better communication, and there is a terrific side effect. Since some fraction of clients get some fraction of their information from our new media efforts, we have more time to talk one-on-one when that is needed. Whether you follow on Facebook or Twitter or subscribe to the blog, we have more time to talk.

More communication, more time, potentially better investment outcomes….life in the 21st century is incredibly grand. We’re glad you are with 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.

Investing involves risk including loss of principal.

The Times, They Are A-Changing

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Forty years ago, poet Bob Dylan wrote a song that echoes a universal theme, the idea of constant change. One may trace this concept through all of history, from the ancient civilizations of Greece, Rome, Egypt, India and China down to our day. Dylan’s lyrics borrow from both the Bible and Aesop’s fables.

Yet there is a tension between constant change and our very human tendency to believe that current conditions and trends will continue. It is appealing to believe that we can know the future by extending past trends. When gasoline first hit $4 per gallon a few years ago, the media was full of predictions that the price would rise to $7.

We call this tendency “straight line thinking” because it involves looking back over a limited time to identify a straight line that can be extended into the future. Gasoline was $1.50 in 2002 and $4 in 2008; anybody could see the trend and many concluded that $7 gas was coming.

Yet nature abhors straight lines. When you open up your view to take in a longer time frame, you see cycles of up-down, up-down. Like the tides or the seasons, cycles seem to offer a more useful way to think about the world.

So our quest is to find good values, bargains, that may be due for a change in direction as the cycle turns. This contrarian method of investing is no guarantee of success. All of our clients have had the experience of owning a supposed bargain that became cheaper or even much cheaper. Yet it is the most promising way to approach investing, in our opinion.

Why is this? The first one now will later be last, the slow one now will later be fast, and the times… they are a-changing.


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

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

The Fruits of Investment

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Imagine for a moment that you are a simple farmer cultivating a modest but lush orchard of apple trees. Every year you reap a bountiful harvest of fruit to feed your family, with some surplus to sell for other foods and necessities you can’t grow yourself.

Every once in a while your neighbor comes by and offers to buy all your trees for firewood. Even if he offers you a generous price, accepting it would be foolish: the money you could sell it for would sustain you for a while, but it would not produce new crops for you year in and year out. It would run out where a well-tended orchard could keep providing for you long after.

One day your neighbor comes up to you in a bad mood, still wanting to buy your trees. The timber market has been flooded with cheap wood, cutting into his profits, so now he can only offer a much lower price for your trees.

If you wouldn’t sell your orchard when the price is high, why on Earth would you want to sell it when the price is low? As long as you plan to keep your orchard and live on your fruit crop, it shouldn’t matter to you what price someone may quote for it.

For those of us planning to retire on our investments, we would do well to heed the parable of the orchard and the fruit crop. Many retirees plan to live on a portfolio of income-bearing investments. We know that investments are subject to volatility, and at some point in your retirement you will probably see price swings in your investments—even government bonds and other conservative investments are not immune. But your ability to pay bills and buy groceries doesn’t depend on the market value of your holdings, it depends on the dividends and interest payments they generate. As long as your “fruit crop” is secure, you have no reason to sell your orchard. Therefore it doesn’t matter what someone wants to buy it for.

Investors, like farmers, sometimes suffer crop failures—there are no guarantees. But it is the stability of your income that should concern you first and foremost, not the stability of your price.


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

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

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

Is the Market Too High? A Principled View

We follow three guiding principles in our work. Avoid stampedes in the markets, find what we believe to be the biggest bargains, and seek to “own the orchard for the fruit crop.” (The orchard analogy for income-producing securities is apt, since neither crops nor dividends are guaranteed.) In this letter, we will explore how these principles apply to one question that seems to be quite common these days. The question is whether the stock market is simply “too high,” based on the move up from the panic lows of 2009.

Our first principle, avoid stampedes in the markets, is based on our understanding that the stampede is usually going the wrong way. There was a stampede into tech stocks in 1999, which ended badly. There was a stampede into real estate in the early 2000’s, which ended badly. There was a stampede into commodities after that, which ended badly. In short, major peaks are usually accompanied by a stampede of money that drives prices to extremes. Our observation is that there has been no stampede into stocks yet, no overwhelming volume of money driving prices to ridiculous levels.

Our second principle, seek the best bargains, lets us sort “the market” into its pieces. The three major asset classes are stocks, bonds, and cash alternatives. Cash and its alternatives currently earn zero-point-nothing interest rates; bonds are barely better. Diving one level deeper into stocks, we find that some sectors and industries are expensive and others appear to be bargains. For example, natural resources in most forms have seen falling prices for several years. Oil is about one-third of the 2008 price; copper is near a decade-low; the price of iron ore has been falling for four years. So stocks in the largest global natural resource companies are as low as one-third or one-fourth of the peak prices of a few years ago.

As a counterbalance to natural resource companies, we have found potential bargains among companies that benefit from low energy and resource prices: selected automakers and suppliers, airlines, trucking companies, and manufacturers. While “the market” may or may not be too high, these companies certainly do not appear to be too high.

Our third principle is to seek to own the orchard for the fruit crop. Portfolio income is an important component of total returns, and those among us who rely on our portfolios to buy groceries surely understand the importance of cash income. As noted above, interest rates remain very close to zero—we do not believe that bonds or cash alternatives are a good way to generate income these days. But we are currently enjoying generous dividends from many companies in the bargain sectors, including the oil and natural resource companies. Other holdings purchased in past years continue to pay regular dividends, from pipelines to telecom to auto stocks.

Summing up, this study of our principles leads us to say “the market” is not too high, particularly the sectors we currently own. No guarantees, of course, and past performance is no guarantee of future returns.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

Stock investing involves risk including loss of principal.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Investing in real estate involves special risks such as potential illiquidity and may not be suitable for all investors.

The fast price swings in commodities will result in significant volatility in an investor’s holdings.

Precious metal investing involves greater fluctuation and potential for losses.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

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

No strategy assures success or protects against loss.