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My Investment Philosophy
Preserve Capital
I have come across many individuals who have recently suffered painful, major losses, some of more than 80%, as a result of over-concentration in 'trendy' investment areas that had overshot their fair value. This is a familiar theme in the lore of investing - investors jumping on a bandwagon regardless of the fact that it was about to fall off a cliff! The prospects always seem glorious: whereas the Internet, technology, and NASDAQ was going to take over the world just recently, in the late 80's it was Japan that was supposedly unstoppable. Ten years before that, gold was supposedly the only choice one had to make.
To preserve capital, we need the exact opposite approach: diversify into several asset classes. Someone once said that 'diversification is the only free lunch on Wall Street', and it's true. Any asset can lose value in inflation-adjusted terms at some point in the economic cycle, and that includes cash. So it is important to combine equities, bonds, cash, inflation-proofed bonds, and other assets to ensure that all potential economic circumstances are protected against. Numerous studies have shown that the asset allocation decision has a greater effect on investment performance than anything else. Furthermore, it is useful to diversify within an asset class. Seek a variety of different investments to spread out the risk.
It's a nasty fact of mathematics that a 50% loss requires a 100% gain to bring you back to your starting point. And that means years lost. Therefore, avoiding losses is exactly equivalent to increasing the length of time available to achieve investment returns.
Rule of Price
I have found that most investors pay more attention to what they are buying, and very little to the price they are paying for it. They look at sales and growth figures, products and markets, but at the end of the day, whether they pay 12 times last years earnings or 22 times seems to matter very little. I take the opposite approach: I do need to know what I am buying, but I am even more concerned about the price. The goal is to buy something for less than it's worth. This approach is called value investing, and it is the approach taken by the world's most successful investors.
Don't Ignore Foreign Markets
There are likely more bargains internationally than here at home, where stocks are well researched and analyzed. Sometimes entire countries see their stock
markets either rise to ridiculous extremes, or fall to levels that can only
be described as the bargain of a lifetime. A policy of searching out the
best bargains worldwide, wherever they may lie, can have an enormous impact
on your performance. There tends to be a fear of investing in foreign
markets that is often unsubstantiated by the facts. Sir John Templeton
invested in Japan in the 1960's, when valuations were incredibly cheap and
the long-term prospects promising. But at the time, many investors would have
been uncomfortable with Japan as an investment. 25 years later, Japan
seemed to be the only place to be invested in! Perceptions change, and what
was risky and unfamiliar becomes commonplace. For my analysis of the
investment prospects of Eastern Europe, please read my newsletter "Central and Eastern Europe: The New Tiger Economies?"
Lower Fees if Possible
There are incidental costs associated with owning investments. Some are worth paying, others aren't.
For example, mutual fund management expenses are typically expressed as the Management Expense Ratio (MER), and can go as high as 4% or more in the case of some specialty funds. If a Canadian Equity fund manager simply goes and buys the 'standard' blue chip issues associated with underlying stock indices, there is no valid reason to pay 2.5% for the privilege. Far better to just buy iShares, with an expense ratio of under 0.2%.
There are some mutual funds that follow the same value approach as I prefer to follow, and I unhesitatingly recommend these to my clients. In these cases, the fees are paying for something of value to investors - a disciplined, proven approach to investing.
I like to use other investment vehicles as well. One of my favorites is closed-end funds. These vehicles generally have MERs of around 1%, offer professional management and diversification, can be bought and sold on an exchange like a stock, and, as a kicker, often trade at a discount to their underlying net asset value. Closed-end country funds are a cheap and efficient means of entry into those markets, as are closed-end foreign bond funds.
Stick With The Plan
I can't begin to describe how damaging impulsiveness is to investment performance. To act impulsively is to act quickly on a poorly thought-out investment decision. The operative word here is fear, either fear of a loss, or fear of missing out on a gain. When you operate on the basis of emotions, poor decisions are often the result. Furthermore, even if the result turns out favorably, a dangerous precedent has been set in your mind, and the next deviation from the plan will be much easier to rationalize. Impulsiveness can quickly lead to a 'trading' type mentality, and can quickly become addictive. Market Action quickly replaces Underlying Value as the driving force behind investment decisions, and very few investors have the emotional tools to play that game. I don't do it with my clients.
Manulife Securities Incorporated
11 Bond Street, Suite 104
St. Catharines ON L2R 4Z4
Toll-Free: 1-866-864-9652
Telephone: (905) 704-6650
Email: scott.swallow@manulifesecurities.ca
The information contained herein is for Canadian residents only and does not constitute an offer to sell or a solicitation in any foreign jurisdiction, or in any Canadian jurisdiction where Scott Swallow, is not qualified to effect sales.
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