Our Investment Philosophy

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Our Investment Philosophy

We believe that value investing will continue to provide superior returns over time. We believe that you should buy low and sell high, contrary to what many investors end up doing, as they react to the two basic investor emotions of fear and greed. Because those emotions result in irrational investment decisions, investors need an objective third party advisor to help them remain rational and stay the course to reach their investment goals.

Benjamin Graham’s classic book Security Analysis, published in 1934, introduced the concept of value investing. If you buy stocks priced at less than book value, in time the market should reflect at least their stated book value. Graham was followed by many notable value investors such as Warren Buffet, Ned Davis, Charles Brandes, Christopher Browne, Jeremy Grantham, Rob Rodriguez and Bruce Berkowitz, to name a few who attest to the philosophy that value investing will outperform growth investing over time.

In his July 2005 article, “The Trouble with Value”, Ben Inker from GMO states that the Russell 1000 Value Index has outperformed the Russell 1000 Growth Index by 2.2% per year since inception in 1979. Splitting the S&P into value and growth on price/book shows an advantage of value over growth of 2.1% per year since 1960. And the cheapest 50% of the stocks on price/book beat the most expensive by 4.9% per year in the EAFE since 1975.

Value investing is the strategy of selecting stocks that trade for less than their intrinsic values. The market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long term fundamentals. Value investors select stocks with lower than average price to book or price to earnings ratios and / or high dividend yields.

What is interesting is that many of the same stocks that can be found in a growth manager’s portfolio are also found in a value manager’s portfolio. The fundamentals that define value investing are solid. The application is less clear, as different managers come up with different metrics for selecting stocks, and stocks move in and out of the value box as metrics change over a business or economic cycle.

Investment Principles:

  1. Strategic value focus.
  2. Managing risk trumps portfolio return.
  3. Asset allocation starts with the fundamental mix of stock, bonds and cash which have not exceeded the maximum downside risk that the client can tolerate based on back-testing portfolio performance.
  4. Use tactical asset allocation to react to changes in market cycles and adjust portfolio’s risk level to keep clients in the market.
  5. Rebalance every 12-18 months or whenever necessary:
      • to manage portfolio risk
      • when portfolio model guidelines are exceeded
      • when tactical changes to our asset allocation model are mandated by changing economic/market cycle
      • when clients’ investment horizon or financial situation changes
  6. Tax-efficient mutual funds, ETFs, tax-efficient separately managed accounts, municipal bonds and annuities will be used to optimize after-tax returns for taxable accounts.
  7. Income protection vs. growth is our primary goal for retirement portfolios.
  8. Income protection strategies are utilized for clients approaching retirement.
  9. Individual stocks will be limited to 10% of a client’s investment portfolio. Our objective with clients holding stock options or concentrated equity positions is diversification to mitigate portfolio risk. However diversification strategies must take into consideration tax consequences such as using tax efficient separate account managers.

No investment strategy can guarantee a profit or protect against loss. All investing involves risk, including the possible loss of principal