My Investment Process

Investing is never easy.  It is logical to seek help in navigating the investment waters.  However, as a business, the investment biz has few peers in terms of profitability.  Why, because professionals have benefitted from complicating the process over time - by refining and dividing investment decisions into ever more specific goals.  No longer is it good enough to be a "hedge fund" manager, one could be an "event driven credit oriented small cap manager".  How much do you put into that idea, if you can even figure out what it is????  The more obscure the technique, the higher the "economic rents" paid to the activity - i.e. more money for the manager.  It is my opinion that it doesn't have to be that way.  Often the best ideas are the most evident.  What we have to move away from is thinking of the big score - the one investment that will carry us into a comfortable financial position.  Investing truly is an incremental activity where good decisions will bear out over time.  Now, that doesn't mean everything will always work out - that "cheap" stock that you bought may remain "cheap" longer than you can remain solvent!  A good manager will recognize that they are wrong and take action - move on to the next idea.  The key is not putting so much into one idea that it blows you totally off course.

In a costless world, one would hire the best manager for every type of investment decision, while being careful not to split the portfolio too finely.  An example:

an asset allocator to decide how much to put into stocks bonds and cash
a stock allocator to decide how much to place in value and growth orientation portfolios
a stock picker for the value portfolio
a stock picker for the growth portfolio
a bond allocator considering the weighting of government vs credit
a bond picker for the government bonds
and, well, you get the picture.

The problem with this approach, aside from the difficulty of ascertaining which is the "best" is, in a word, fees.

Many economic studies have shown that fees usually more than offset the value added from the manager's skill.  This has led to the, justifiably, wide-scale adoption of index strategies and the stunning growth of a marvelous company called Vanguard Investments.   While this can take care of some portion of the total portfolio investment process we are still left with MAJOR decisions in the allocation department.

My investing method is based on a total portfolio approach.  I think it is putting too much burden on the non-professional investor to have to figure out how much to put into specific strategies.  If I were to put a label on my philosophy it would have a value slant - I actually care about current earnings and dividend payouts.   There is a place in the portfolio for more speculative growth stocks, but, again it should be up to your manager to decide how much.  I am usually preoccupied by asset allocation, how much I put into stocks vs credit (bonds) vs government securities and cash, rather than by picking individual stocks.    

My target is to beat inflation by 2% net of fees.  My research has shown me that is the level of return that I need to earn to have a reasonable chance to be financially independent.  There are many assumptions that go into this conclusion (I will look to post this model for anyone's use, in the future).  The primary assumption is that I look to receive a little less than 2% from my investment portfolio on a yearly basis to fund my expenses.  If anyone were to ask me what they can invest in to make money I often point out that the only sure fire way to earn more money is to spend less.  This is not a glib response, it is based on statistics.  Investing is a probabilistic game, there is an expectation of return but there is a whole range of possible outcomes over every given horizon.  Spending is, to some extent, controllable whereas investing is completely to chance.  Perhaps you can move the odds in your favor a bit, but it's chance nonetheless.

My goal for this blog is to provide one person's perspective on the investment world, maybe spark some ideas and hopefully help readers make a few better decisions over time.  I welcome discourse and I will try to back up my statements with some tangible evidence.  I offer no guarantees that anything I say will work out.  What I CAN guarantee is that, for better or worse, the ideas I express in the blog will reflect what I am doing with my own money.