“What We Believe”
The only sustainable basis for a successful advisor/client relationship is perfect mutual trust. I propose to earn your trust by telling you the pure, undiluted truth—as I’m given light to see the truth—all the time.
The only rational medium for an advisory relationship worthy of the name—and the only basis for an investment portfolio—is a plan. Be it as simple as a retirement income plan that we write out and agree on, or as ambitious as a comprehensive financial and estate plan, we can only relate to each other successfully through a plan. A portfolio is never an end itself; it is a means to the ends of the plan, or it’s nothing.
In the long run—and that’s the only rational way to invest—the only sane definition of money is purchasing power. Currency isn’t money; it’s just currency, and it loses some of its purchasing power every day, because of inflation. Even if you preserve your principal, when your cost of living doubles (as it likely will), you’ll have lost half your purchasing power.
Equities—the partial ownership of the Great Companies in America and the World—have been far more effective than bonds and other fixed income investments at preserving and indeed enhancing purchasing power.
Since 1926, large company equities have compounded in value at about ten percent; small company equities have compounded at almost twelve percent. Long term, high quality corporate bonds have produced an annual compound return of about six percent. Most importantly, the cost of living has compounded at three percent. Thus the real return of owning companies (the margin of safety they’ve provided over inflation) has historically been two to three times the return of lending to companies. This is the essence of why, for the lifetime and even multigenerational investor—which substantially all my clients are—I greatly prefer to be an owner of companies rather than a lender to them.
Equities’ superior long-term returns are a function of—indeed they’re directly caused by—their greater volatility. But volatility is not the same thing as risk, because all the historical declines have been temporary, while the advance of the equity values (again, at a ten to twelve percent compound rate) has been permanent. Volatility passes away, but the returns abide.
Since the end of World War II, which is roughly the life span of people who’ve recently entered retirement these days, the equity market has experienced an average intra-year decline of 14%. Temporary declines of 15% to 20% have taken place on an average of one year in three. And “bear markets” as classically defined—i.e. minimum 20% temporary declines actually average nearly one third—have taken place about one year in five. Yet, the equity market today stands more than 70 times higher than it did coming into 1946. Dividends have risen more than 40 times. (Meanwhile, consumer prices are only up about 13 times, but that’s irrelevant to the point I’m making just at the moment, which is simply that volatility has always been the temporary interruption of a pattern of permanent advance).
Hence we see that the real long-term risk of owning equities is embedded not in the values of the companies themselves, nor even in the global economy, but in the emotions of the investor—that is, in the proclivity that’s hard wired into all of us to fear that a significant temporary decline is actually the onset of some apocalypse.
Thus, the dominant factor in long-term, real-life financial outcomes isn’t investment “performance;” its investor behavior. And my primary value to my clients is as a behavioral coach.
The economy, the markets and future relative performance of similar investments, can’t consistently be predicted, much less timed. But that’s all right, because compared to the way your assets are divided (owning those variable are almost irrelevant. In practice, the only way to capture the full permanent return of equities is to be willing to sit through their full temporary volatility.
No one can gain an advantage over the equity market by going in and out of it because of current events or perceived threats. I don’t attempt to analyze (much less predict) current events. For the reason given in the last point, I will always counsel patiently holding the portfolio which seems best suited to your long-term goals.
I charge one percent of the assets under management, essentially for behavior management. If it helps to clarify this point, I am offering you, a retirement income plan, portfolio design and selection, monitoring and reporting, and most if not all service. You basically have to be convinced that behavioral advice—against panic in falling markets and euphoria in soaring times—is likely going to be worth multiples of one percent per year, or you ought not to engage me.
I believe that uncertainty—in the markets and indeed the world—is the only certainty. We don’t seem to move from periods of uncertainty to periods of certainty; rather we move from one uncertainty to the next. Thus I counsel what I refer to as rationality under uncertainty, which just means that I believe that history is the best guide—perhaps the only guide—to the long-term future. I base my philosophy on two texts. The first is from Harry Truman, who said, “The only thing new in the world is the history you do not know.” The other is from the legendary investor Sir John Templeton, who said, “Among the four most dangerous words in investing are “It’s different this time.”
Thus I believe that long-term optimism is the only long-term realism—never more so that at the present moment.
There were fewer than 300 million middle class people in the world in 1980; today there are two billion, and in a dozen more years there may be as many as 3.6 billion. That is, the globe is incubating billions of new consumers (and investors). GM sold ten cars in the US in 2004 for every one it sold in China; today, it’s at parity. And this is just getting started. Eighty percent of Americans own a car; 20% of Brazilians do. Nearly 90% of Americans own a cell phone; perhaps 30% of Indians do. The second billion smartphone users will change the world. This is the future for investors.
From a hopeless addict to imported oil, this country suddenly finds itself sitting on a hundred years’ worth of cheap, clean natural gas—more than enough to make us energy independent, and more than enough to make us huge net energy exporters—thus slashing if not eliminating our balance of payments deficit.
Technology marches on. All the great technology companies of the last four decades have been American: Microsoft, Cisco, Intel, Apple, Amazon, Google—and yes, even Facebook.
Moore’s Law dictates that the cost of computing will fall 97% in the next ten years. Robotics costs are already falling at a 30% compound rate while Chinese labor costs are inflating at 20%. Thus, between technological advances and cheap natural gas, don’t be surprised if the dominant manufacturing country in the world in 2020 is us. In ten years, driverless cars will just about be here. Today, we’re 3D printing medical devices; in ten years, we’ll be starting to print organs. I can go on and on like this. But I won’t.
That’s who I am. Those are the principles I believe in. Those are the things I can and can’t do. I’d be happy now to answer any questions you may have.
Stock investing involves risk including loss of principal. No strategy assures success or protects against loss. Indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Statements of forecast and trends are not guaranteed in the future.