risk vs reward

Make Believe

© Can Stock Photo / nameinfame

It’s good fun to watch small children at play, using their imagination – they might be pirates or princesses, or serving imaginary meals, or having conversations with stuffed animals.

What is not good fun are financial types who pretend that so-called “market-linked” products actually provide exposure to real investment market returns. Often, a formula used to determine returns pays only a fraction of percentage gains, puts a maximum limit on returns, and ignores the effect of dividends. That’s investing only in the same sense that talking to a teddy bear is actual conversation*.

There is another common form of make-believe in the investment world. Some pretend that one might sharply limit the ups-and-downs in an account, yet still reap stock market returns, through some special strategy or tactic. Our view is that this is pandering. Long term investing is about willingness to accept a certain amount of risk in pursuit of getting paid.

Both of these fantasies play on the natural human desire for stability. But lower volatility may come at a cost of lower returns or higher costs. By the time the investor figures out there is either less stability than expected, or lower returns, a lot of freight may have been paid. Skip the make-believe, keep it real.

Clients, not everyone agrees with us – we hold contrarian views. If you would like to talk about this or anything else, 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.

Ask Your Advisor if Asymmetric Returns Are Right For You

© Can Stock Photo / ivelinradkov

Those who know us best have probably noticed one of our investment tendencies. We lean toward those opportunities where we perceive a high probability they will work out over time. One of the hallmarks of our method is seeking bargain valuations . Quite often, these are in boring but essential industries.

One of our major current themes is the evolution of the automobile. It takes 3 cents worth of electricity to go a mile in an electric car or a hybrid in electric mode. But it takes 10 cents worth of gasoline. The seven cent difference figures out to $175 billion per year in the US1. The change won’t happen overnight, but the economics will only get more compelling over time.

Large global auto manufacturers appear to be trading at bargain prices. One of them has sold hundreds of thousands of hybrids. Another is launching the first all-electric vehicle priced at mass-market prices. Sophisticated suppliers that are bringing new things to the manufacturers also figure into our strategy. These companies are attractive, based on our traditional research methods.

There are other players, however, that do not fit our usual specifications. Silicon Valley is full of disruptive visionaries trying to turn the auto industry upside down. Maybe they are geniuses, and maybe they are nutcases. But if an upstart company can capture 3% of the new vehicle market over the next few years, the payoff may be considerable—or, they could go broke in the face of their many challenges.

A dollar invested could be lost—or could turn into many dollars. There are no guarantees here: this is more speculation than investment. This is what is meant by “asymmetric returns.” It probably won’t work out to where you could make only a dollar or lose a dollar—the potential gain and the potential loss would be symmetrical in that case.

One might consider a small investment in an upstart as a hedge on our other holdings—a way to cover all the bases. We’re not going to change our core investment philosophy. Speculative investments are not appropriate for all accounts, and they will never replace the timeless principles that shape the vast majority of our portfolios. This is an evolution in our thinking and methods and we thought we ought to keep you informed. If you would like to discuss these ideas or other parts of your situation, please write or call.

1. Figures derived from US Department of Transportation statistics and the American Petroleum Institute.


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

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Investments mentioned may not be suitable for all investors.