10 Investment Concepts

James Pope |
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DIS and DAT - 10 Investment Concepts - January 2018

Our periodic communication that reminds you to ask, “Should I react to those headlines?”

 

“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.”

Confucius


Friends,

            I am sure, by all 3 methods, listed by Confucius above, we have come to share 10 concepts for improving investment results.

 

  1. Investing is personal.  Each investor has unique qualities, situations and circumstances.  We do not believe it is wise to blindly follow others.
  2. Exhibition not a competition.  Investing is poorly done when pursued in the objective of beating others.  The risk that other investors are taking may not be exposed until it’s too late.  We do not believe investing for the purposes of competing with others will be rewarding.
  3. Process over performance.  Performance fluctuates.  Even when an investor does everything correct, the result over a specific time frame can be frustrating.  It can be negative.  It can be below your buddies.  It can be below another investment you almost chose.  The worst mistakes in investing relate to an investor changing their holding, strategy, or philosophy based solely on price performance.
  4. Contrary Mindset.  This topic could be a book by itself and several books have been written about it.  The main point is that an investor will frequently pay a lot more to enjoy the popularity of his ideas amongst other investors.  Buying when others are recommending selling and prices are falling is extremely difficult.  Likewise the opposite is typically true as well.  This independence of thought is extremely important in investing.
  5. Business analyst mindset.  Many analysts are stock analyst.  Others are market analyst.  Still others are economic analyst.  The mindset to evaluate investment opportunities the way an owner of a small business would think if acquiring another business is the way we believe individual investments should be considered.
  6. Development mindset.  Most people believe that either they or someone else was born with investment skills.  We believe this thought can lead to failure.  Skills and knowledge must be developed and learned over time.  Read, read, and read.  Do not fall into a trap of thinking when “things go bad” that your investment manager just doesn’t have it.  Investment returns move in cycles, and they cycle, and they cycle more in unpredictable fashion. Popular studies from professors indicate there are several natural tendencies (biases) which humans possess that can make the task of investing more difficult. The biases can arrive in strange forms from time, so unlearning can take more than just reading; unfortunately some learning will come from participation.
  7. Separate Investment funds from non-investment funds.  At a minimum you should not invest, or subject funds to investment risk, which you expect to need in Three years or less.  We believe these assets should be kept in money markets, cd’s and treasuries or very high quality bonds of appropriate durations.  The obligation for those instruments is on the bank, government, or corporation to repay.  A purchaser of those will not have to decide “when to sell” as you do with most investments.  We believe that capital set aside for investment purpose, but without a destination yet, should be kept here as well.  We have seen many hedges fail at the wrong time, while awaiting a certain investment price to “pull back”.
  8. Diversification of risk drivers.  By now many investors have heard the old sayings, “do not put all of your eggs in one basket.”  We believe it takes more than just dividing up assets.  We believe you should divide up assets into investments that have unique risk drivers.  Risk drivers include inflation, interest rate, economic fluctuations, bankruptcy, take over, exposure to certain commodities, exposure to certain industries, exposure to certain currency to name a few.  Besides those risk drivers, time should be diversified.  Exit or liquidation possibilities should be diversified as well.
  9. Low Turnover/Activity.  Usually turnover brings with it higher fees, higher taxes, and more stress.  Besides the direct negatives the mindset does not match an INVESTING TIME HORIZON.  Warren Buffett’s partner, Charlie Munger calls it sit on you’re a$$ investing. As average human beings, we are all prone to believe we are above average and have more knowledge then the rest on all things.  In today’s market place of quick information dissemination that is not the reality for the “average” investor.  We believe a minimum time frame for investment activity is three years.  Most of the time your investment portfolio needs to be focused even further out then three years.
  10. Comprehensive Reviews.  We believe the investment portfolio is only part of one’s financial circumstances.  Taxes, Insurance, estate planning to name a few are closely related to investments.  At some scheduled interval reviewing all is helpful.  If you wait till an emergency pops up it may just limit the flexibility to deal with the issue.

See you next time.

 

James Pope

 

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