Money Management (Investment Management)
Our
investment
philosophy is an eclectic one. We believe that the income and credit
method of
analyzing an investment (as taught in the lending and bond industries)
plus
mean reversion analysis is the best way to analyze stocks, real estate,
and of
course bonds. Income and revenue are fairly reliable, stable metrics
(if
adjusted for inflation, mergers, one time expenses and averaged over
ten years),
but balance sheet items are often unreliable and subject to being
warped by asset
bubbles. This means buying quality companies with stable growing
earnings, low
debt and low or moderate p.e. ratios are the key, rather than buying a
company
that has a hot product or the best balance sheet items such as cash on
hand,
net worth or attractive assets, as these can quickly be squandered,
especially
in a sudden bear market crash. We enjoy looking to the big picture
global top-down macro economic view to decide what asset class may be
best. We believe in diversification. Most importantly we believe in
being modest and flexible and not having a stubborn "know-it-all"
attitude, rather think like a researcher who is open to new paradigm
destroying ideas. Regarding the “efficient market hypothesis”,
that is too impractical to work in the real world; instead in the real
world
the market most of the time is very inefficient. Individual investors
in the
aggregate make very emotional and inefficient choices, especially
during the
tech stock bubble of 2000 and the real estate and mortgage bubble of
2007.
Also, the professionals who work in institutional investing make
emotional
decisions and cave in to emotional pressure from the masses of
consumers. A
study by Dalbar showed that individual investors made 3% in the 1990’s
when the
market returned 17% a year. This was because intervals were buying at
the top
and selling at the bottom in response to emotions.
Our philosophy is
that it is best to own an investment with no leverage, which means no
margin
loans, no options, and no futures contracts. When investing in
commodities it
is best to simply buy the companies that make them instead of holding a
warehouse full of commodities. When you buy a company you get the
wisdom of the
employees who decide whether or not to stock or to produce more
commodities; by
contrast a warehouse full of copper or oil just sits there with no one
thinking
for you what to next, meanwhile the meter is running for the warehouse
fees. For
real estate we prefer publicly traded REITs with minimal debt. We
prefer to
avoid illiquid non-traded assets such as Limited Partnerships or
directly
owned real estate. However, if someone already has a proven track
record of handling directly owned real estate as the sole owner and his
properties are financed with low, stable levels of debt then we are
willing to be flexible about that issue. Buying stocks an investor
should think like Warren Buffett
and take the attitude that “I buy a business, not stocks”, which means
that one
should not look at fluctuations in share prices but instead look at
fundamentals.
* Independent, objective advice is
vital to creating the
correct
plan
* Each person should establish and follow a customized
Investment
Policy Statement
* Maintaining low investment costs is important in order to
reach
plan goals
* Be aware of hard to notice annual fees and the cost of
mutual
fund operating expenses and fund's intangible cost of "trading impacts"
in no-load funds that can amount to three percent per year.
* Avoid making investments that are hard to get out of (such
as
an annuity with a surrender charge, or a limited partnership)
* Avoid making investments in mutual funds with a "Load Fee"
* Avoid seduction and manipulation by marketplace hype and
hysteria
* Do not talk to friends or coworkers about investments or
economy
* Do not read the general media about economy or
investments-instead
read scholarly journals and books
* Avoid listing to sound bites offered by broadcast media,
instead
read scholarly media
* Clients need to work with an experienced, mature, dedicated
fee-only
financial advisor with credentials such as a CFP®
certificate
* Think creatively, objectively and independently from the
popular
mythology of the general public
* Recognize major structural changes in the economy before
others
do
* Be aware of how crowd psychology brainwashes investors to
make
bad decisions
* There are fundamental reasons why P.E. ratios should be at
or
below 15 and if it is over 15 take defensive measures.
* The true history of the market is masked by inflation and by
one-time
non-recurring gains
* The true total return of the equities market is not nearly
as
good as it appears
* Investing in illiquid investments that have large minimum
investment
amounts produces a better return than publicly traded securities
* Avoid exotic hedge fund strategies with derivatives, instead
buy
something that is straightforward and clearly understood
* Investing properly requires plenty of liquidity or other
staying
power for emergencies-avoid selling your investments when you need to
spend
money.
* Investing properly requires tax planning
* Investing properly requires cutting the costs of broker's
commissions,
mutual fund fees, etc.
* Avoid debt-do not increase the loan balance on your home to
fund
other investments
* If buying a home limit your new mortgage balance to the
amount
offered by the most conservative lender-do not go to the most
aggressive
lender and get a larger loan.
* If buying investment real estate (non-owner occupied) avoid
a
negative (before-tax) cash flow and assume that you will be stuck with
the property for seven years
* Save at least ten percent of your income
* Success in financial planning comes from saving rather than
finding
a miracle way to "beat the market"
* Survival is the only path to riches (so avoid excessive or
hidden
risk)
* Do not assume patented technology products produce profits
for
stockholders
* Stock options issued to employees need to be expensed to
have
an accurate financial statement for publicly traded securities
* Diversify your investments
* Boring investments are good/exotic ones are dubious
* Do not trade frequently, instead buy and hold
* Do not watch the market during trading hours, instead learn
fundamental
analysis and ponder key structural problems
* Remember: "The fastest way to make a small fortune is...with a
large one" (due to reckless, naïve investing)
Mayflower
Capital
Donald Martin, CFP®
1000 Fremont Ave. Ste. 135, Los
Altos, CA 94024
Telephone (650) 949-0775
Mayflower Capital is a Registered Investment Advisor Company.