Money 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, but only after real estate reaches the bottom (in 2015?). 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. When 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 after adjusting for inflation
* 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
* Do not assume companies located in high growth emerging markets produce profits for stockholders that are in proportion to the growth rate
* 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)