Investment Management

We advise clients on portfolio creation, selection, management and monitoring of investments. Most of our clients choose to have us manage their investments directly. We use mutual funds, exchange traded funds (ETFs), stocks and fixed income instruments. We fervently believe that long-term success is achieved through global asset allocation and rebalancing.

  • Investing and Capitalism

    The first basic notion of investing is your belief system. For example, we believe that capitalism works. Capitalism is the notion that humans will constantly strive to improve their lives and will do so through the private (corporate) ownership of property held for profit. Capitalism works through a market economy, which rewards the winners and punishes the losers. Through equity ownership, investors can share in the rewards of successful capitalism. Ownership of businesses equates to wealth. This notion that capitalism works is global: it works everywhere, some places better than others - but it still works. This means that to participate in capitalism, we have to have a broad range of assets of different types, sizes, and nationalities. Our grandfathers called it ‘not putting all your eggs in one basket’. We call it diversification.

  • How Competition Affects Capitalism

    A fundamental aspect of capitalism is that competition is ruthlessly efficient in culling the losers. As soon as an entity establishes some notion of superiority, competitors sweep in to reap rewards and improve on or move the leader from the superior position. As a result, markets themselves move the returns on investment back to a ‘mean’.

  • Let's Take an Example

    Take AT&T: It had a global monopoly on a breakthrough technology (the telephone). AT&T wiring is in the Kremlin and the Japanese Parliament. This monopoly allowed AT&T to invent the transistor, the integrated circuit and the cell phone. Yet the long term rate of return on AT&T (about 140 years) is about 9%, or exactly the return on the market as a whole. Even with some non-capitalistic help (patents), AT&T could only achieve average returns. This is by no means a limited example, but instead reflects the reality: The whole system will make money with certainty. Individual stocks may have superiority for a time, but the Darwinian nature of competition will sweep in to make it better, cheaper or faster. For this reason, we choose to prefer asset classes, or groups of investments, over individual stocks. If you never needed any of your investment money, you could invest entirely in equities and you’d achieve over the long term, a substantial rate of return. None of our clients have a goal of never using their money, and most have their money set aside for retirement, which means they will be withdrawing periodically from the pool.

  • The Stock Market is Like E-Bay

    The Stock Market is Like E-Bay
    Equities are volatile, primarily because they are sold in an auction-type market (think of the NYSE or the NASDAQ as a giant E-Bay), and further because their value is based on the perception of the bidding parties. For example, if ‘the market’ thinks that XYZ company has invented some fabulous new process, ‘the market’ will bid on that until it establishes a value for the stock. The bidders tend to be over-exuberant; frequently overbidding on perceived value (running the stock up in a fit of greed), and selling the stock without regard to fundamentals (crashing the stock on a wave of fear). The waves of greed and fear aren’t relevant if you ride them out, but can be fatal (at least the fear cycle can be fatal) if you need money during the trough. Accordingly, for anyone needing money sometime in the future, we have a portion of the portfolio in income and liquid assets. These might be individual bonds or bond funds, preferred stocks, money market funds, Certificates of Deposit, or any other of a variety of fixed income securities. These assets provide some liquidity and provide income. The fixed side of the portfolio reduces the portfolio uncertainty and provides some of the withdrawals that our clients need for living.

  • Monitoring Your Portfolio

    Monitoring Your Portfolio
    Another major factor in successful investment management is the maintenance and monitoring of the portfolio. This consists of two aspects: rebalancing and ingredient monitoring. Rebalancing basically starts with creating an effective asset allocation model (determining the ideal amount to invest in various asset classes such as small cap US stocks, large cap international stocks, natural resources, real estate, etc.) and then periodically re-setting the allocation back to the model. Rebalancing is a natural “buy low, sell high” discipline, since it forces the portfolio to take profits (trim the outperforming asset classes) and reinvest (boost the lower performing classes). Rebalancing reduces risk in a portfolio. In an up market, rebalancing will reduce overall return (since you are selling portions of the high performing assets). In an oscillating market (up and down, or cyclical), rebalancing increases return and reduces risk. Rebalancing does not have to be frequent, in fact, academic studies have shown that rebalancing too frequently actually increases costs and increases risk. However, rebalancing is a prudent tool for long-term uncertainty reduction. The second aspect of monitoring is to review asset class ingredients. We use two basic types of ingredients: passively managed, or index investments, and actively managed investments. We find that different asset classes warrant different types of management: for example, in the large US market, an S&P 500 index fund is a very useful, inexpensive and efficient option. In International Real Estate, you absolutely need a manager. We continuously look at our ingredient list to have the ‘farm teams’ ready to go should a fund manager die, leave or fall from grace. In short, our strategy is to get a good recipe with the best ingredients and watch the cooking.