Green Grass Dying

James Pope |
Categories
concepts
DIS and DAT
investing

DIS and DAT - Green Grass Dying - October 2013

“The grass is not, in fact, always greener on the other side of the fence. No, not at all. Fences have nothing to do with it. The grass is greenest where it is watered. When crossing over fences, carry water with you and tend the grass wherever you may be.”


― Robert Fulghum

 

Dear Friends:

            As the first fall breeze blows through the trees and the yards fill with Halloween decorations, the green grass dies and reminds one of the searches for greener grass in investing. We believe that investing performance is harmed when a current strategy is switched based solely on recent relative underperformance.  A common fault of investors is swapping out their current strategy because they learned of some new, popular “strategy”.  Reading Dalbar studies, which suggest individual investors barely meet inflation with their investment results, one may conclude that all this adjusting is harmful to long term investment results.  As is written, “It is easy to see this speck of sawdust in others eyes.”  We are sharing the reasons we have chosen value based investment strategies, and the reasons we avoid some currently popular investment themes, in the hope that knowing more about our thinking, will help to avoid exchanging green grass for that greener grass without bringing a water pail.

            After many years of learning in what some call, “The school of hard knocks” we developed a core group of concepts within our investment strategies.  Core meaning we have spent time researching different methods and believe these concepts will serve us the best over the long term.

  1. Prices of investments diverge from their value and we want to buy at a lower price to our perception of value regardless of current popularity.
  2. Diversification of 17 to 30 positions with unique risk drivers is appropriate when one lacks control over the operations of the investment.
  3. The ingenuity of human beings creates and destroys long-term value in general.
  4. The passage of time is necessary for current market fads to shift.
  5. Investing directly to the source of value can avoid layers of expensive management.
  6. Risk is more than just volatility.
  7. The investment future is unpredictable and not worthy of guessing.
  8. Investing is individual.
  9. Changing markets require updating ones knowledge.

            Reviewing this list brought to mind a few other points.  This next list could be described as concepts we have learned regarding the task of managing money for other people. So here are some thoughts on improving long term results by improving communication between advisor and client.

  1. A low scheduled withdrawal allows more flexibility for the uncertain future investment circumstances.
  2. Prior to beginning the emotional stress of investment selection, asset allocation targets should be decided by the client based on personal objectives, and tolerance for risk.
  3. Individual comprehensive reviews serve to remind clients why certain target allocations were chosen.
  4. Past price performance and popularity are terrible reasons for selecting an investment.

Now we have a few thoughts regarding why we have chosen to avoid some of what we believe are current investment fads.

  1. Investors placing a substantial amount of a portfolio in a variable annuity with a “guarantee rider”.  First, we do not believe a single product can protect against ALL future unknown risk. Second, the cost of the guarantee over time is very large when compounded for years. Third, the complication of the product may lead an investor to have buyer’s remorse at some point. This popular investment violates our concepts numbers 2,5, and 6 above.
  2. Financial Planning is a must for investment success.  Specifically we are referring to the projections of future outcomes based on assumptions. We believe there is lot of time, money, and attention placed into a “product” which involves very unlikely future value for the consumer.  In other words, just about the time the ink is dry one of the assumptions is already incorrect, or was not given thought. We believe it can give a false sense of security, in a very uncertain financial world. Instead of financial planning, we believe realizing the future is uncertain and requires flexibility is more valuable in the overall financial strategy. Therefore, spending valuable resources on using assumptions to predict future outcomes violates our number 7 concept above. This in no way suggests that investors should disregard attention to other parts of their financial lives.
  3. Indexing is the solution to all of investors’ problems.  This thought comes to mind as reports that, the world’s sixth largest pension fund, is moving towards this form of “management”.  Boy has this become popular!  We believe it is not a full investment strategy, but only a tool. Buying an index without regard to valuation is against our core concepts number 1 and 8 above, and if much of the portfolio is allocated this way, then number 2 as well.
  4. Certain pooled investment products, such as funds, will be a great investment because they have had great past investment returns.  We believe that the new investor to the pool is paying for the success of the previous owners by buying high.  This can create an expensive investment product regardless of the current stated fee rate.  This investment idea violates our concepts 1, sometimes 2, 7 and 8 above, and our client/ manager concept number 4.

            The main take away is that investment strategies tend to go through good and bad performance periods.  Unfortunately, studies like Dalbar report and our experience indicates that, most investors buy AFTER the good performance periods and eventually sell during the bad performance periods, receiving worse results.  We believe that when individual investors run across someone talking about how great their strategy, advisor, or product is based on past results, carry that water with you and dig a little deeper.  Asking should I trade the risk in that new investment, for the risk in my current strategy? We share this with you in order to demonstrate that in the design of our investment strategies, as well as our firm, we have contemplated ways to combat the green grass syndrome in investing.

See you next time.

James Pope

Please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Diversified Investment Strategies, LLC DBA Advisor.Investments to effect any specific transactions for your account.  A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Diversified Investment Strategies, LLC dba Advisor.Investments), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC dba Advisor.Investments.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Diversified Investment Strategies, LLC DBA Advisor.Investments is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  If you are a Diversified Investment Strategies, LLC dba Advisor. Investments client, please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Diversified Investment Strategies, LLC dba Advisor.Investments current written disclosure statement discussing our advisory services and fees is available upon request.

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