Invest for the Long Term

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We call our investment philosophy the ‘new old school’ because it is getting back to what we consider the basics of investing. When we study some of our favorite investment heroes such as Warren Buffet (1930 – present), Sir John Templeton (1912 – 2008) and George Soros (1930 – present), a general theme emerges – they bought and held investments for significant periods time. Buffet is well known for buying basic businesses with strong management and good cash flow. Templeton’s legacy is to not follow the herd. Soros, who is often referred to as a speculator, was and is no ‘day trader’. Soros's investment strategy is based on long-term macroeconomic themes. He is recognized for pricking economic bubbles, crushing excessive valuation and punishing greedy and naïve speculators. These notable investment moguls were long-term investors and we believe much can be earned by studying and emulating their actions.

Independent Thinking

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Independent thinking is one of the cornerstones of successful investing. When you read the histories of investment icons like Warren Buffet, Sir John Templeton and George Soros, their best investments were not popular or well-known ideas at the time. These ideas were based on an assumption that the ‘crowd’ had not recognized the correct future value of the investment in question. In order to be a successful investor, you have to look into an uncertain future and make correct assumptions today. This is a counter intuitive exercise because by the time the bad or good news arrives it is too late. The basic theory of the efficient market hypothesis is that the value of an investment will be fully realized almost as soon as any information affecting its value becomes public knowledge. When the peddlers of investment ideas from Wall Street make recommendations public knowledge then that news should already be priced into or will be rapidly priced into the investment as soon as news is released to the public. Therefore, you need develop your own ideas long before the Wall Street ‘crowd’ jumps on board because it will be the crowd who will move prices to where you think they should be. That is why you must utilize truly independent thinking and develop your own investment ideas. It is probably no coincidence that Buffet is from Omaha, Templeton stayed in the Bahamas and Soros had to start his own firm to pursue his own investment ideas.

Do Your Own Homework

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'I trust only those statistics I have manipulated myself’ is a quote often attributed to Sir Winston Churchill. When it comes investing, and speaking from experience, it is best to do your own homework. Wall Street is a business of selling information to people to get them to buy or sell something in order to generate a fee. While some research from Wall Street is very good, most of must be taken with a grain of salt. There is no definitive study that proves that Wall Street research is good, in fact, it is quite the opposite. Analysts tend to be overly bullish most of the time and then overly bearish when they should be bullish.^ They are just human beings after all. But don’t get us wrong, there are some good analysts out there. Further complicating this matter, the media gives you snippets generally showing pundits with opposing points of view. So how do you make sense of this noise, or know what to do or whom to trust? Well, the only way we know how to do this is by doing our own research. We trust ourselves. This is truly independent thinking.

^ Cusatis, Patrick, and Woolridge, J. Randall, "The Accuracy of Analysts' Long-Term Earnings-Per-Share Growth Rate Forecasts,” Press Release, Penn State Smeal School of Business, March 2008.

Generate Good Ideas

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In the increasingly commoditized market of financial services it has become more important for investment advisors to differentiate themselves. One method has been to offer a new financial product that either has more bells or whistles such as an insurance product. The strategy of the mutual fund complex is to offer the next ‘must have’ investment product that will help you ‘check off’ another box in your asset allocation or peddling the fund-of-funds retirement product with a name of the year you would like to retire. Another recent fad has been to offer exclusive access to the hottest ‘hedge fund’ manager last year. While each of these investment strategies may be appropriate for some investors, we believe the simplest approach that can achieve a client’s goals with less fees and is easy to understand is probably the best. For instance, a client may want income in retirement. An old-fashioned laddered bond portfolio combined with a simple term life insurance policy may achieve the same objective as a fancy insurance product at a fraction of the cost. In fact, you might not even need the insurance. We like the idea of a laddered bond portfolio because we can control what we own in terms of the credit quality, yield and maturity of the portfolio. It is transparent, there is minimal complexity, we control the turnover of these bonds and it has modularity meaning we can sell any of the bonds, at any time, for whatever reason. We keep it simple. It seems like a good idea to us.

Know What You Own and Why You Own It

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Our core philosophy can be summed up with the phrase ‘know what you own and why you own it’. If your financial advisor cannot adequately explain to you why you own something or what your underlying investments are, then you probably should not own it. If you cannot easily understand all of the fees and are able to make a true assessment of your total cost of ownership, then you should probably skeptical of such an investment. If you feel you are part of the investment ‘herd’ or paying to much for a ‘cookie cutter’ asset allocation strategy then you probably are. If you feel that you have to much turnover or trading in your account, then you probably do. If your statement is full of pages and pages of transactions and you are uncomfortable because you are not sure what is going on in the account, then you should probably make some changes. If your advisor doesn’t do his or her own homework and is peddling his or her firm’s latest ‘best idea’ then you should probably think twice. If your advisor does not develop his own independent ideas or has not brought you a truly unique investment idea, then you are probably a member of the Wall Street crowd. We call our philosophy the new old school because it is about getting back to the basics of investing, avoiding complexity, minimizing extraneous fees and investing for the long term.