Secrets to Success (and Failure)

Your financial goals may vary, but generally include having enough money to provide you and your family a good living over your entire lifetime. Put simply….you don’t want to run out of money.Outperform99Neighbors

As we work with our clients to reach these goals, we adhere to some basic
concepts that have provided for past success and which we are confident will lead to future success. Two of these main principles are:

* Being very well diversified
* For stock investing, using index-like mutual funds, rather than actively managed funds.

For long-time clients, you may understand and be familiar with these principles. For newer clients and those not yet working with us, you may not comprehend the importance of these concepts, and the long-term benefits which they can provide to you and your family.

Over the past two weeks, I’ve seen 2 strong examples of why it is so important that we continually adhere to these core principles. They work over the long term and provide you with important financial benefits. Being extremely diversified and using our style of stock funds will provide you with solid returns which over the long-term will beat most other money managers. Our philosophy will not provide record-breaking returns in the short-term, but these principles will prevent the unnecessary risk of the major destruction of your hard earned money, by concentrating your money in a few financial bets.

Our stock investment philosophy is to utilize mutual funds which are very low cost and in general, track various indexes, with some flexibility. An actively managed fund would have much higher costs and the manager(s) try to predict which stocks they think will be best, based on their research and intuition.

Which style of investing does better over the long term? The SPIVA US Scorecard, which tracks this data, recently reported their results for 2015. The following is the % of managers which underperformed their respective benchmark over the time period:


                                                    One Year               Five Year                 Ten Year

Large cap managers:                    66%                      84%                           82%
Mid-cap managers:                       57%                      77%                            88%
Small-cap managers:                    72%                      90%                            88%


Across all asset classes, evaluating apples to apples, active management is not the best way to invest in stocks for the long term. The evidence is clear, that our method of investing in index-like funds consistently outperforms actively managed funds, especially over the long term. What style are you using? Do you know?

We know that risk comes with rewards, and also the potential for greater losses. We feel that the benefits of broad diversification, by holding many mutual funds which own thousands of stocks across many industries, sectors and geographic areas is the best approach for your serious long-term money. The following is an example of the opposite approach.

A number of very large and prominent multi-billion dollar hedge funds, and some mutual funds as well, invested very heavily in the past year or two in a pharmaceutical company called Valeant. As of March 22, 2016, Valeant Pharmaceuticals International Inc. had lost approximately 70% of its value during 2016 and almost 85% in the past year.

It is not surprising, but still shocking to me, that these huge money managers would risk so much of their money, and their clients’ money, on one company. For Bill Ackman, founder of Pershing Square Capital Management, once a $12 billion hedge fund, his bet on Valeant has led to overall fund losses of 26% for 2016 and 47% since August, 2015, as of the past few days.** Valeant and Ackman’s fund may recover in the long run, but is the extreme risk and volatility worth it? Considering that many of Ackman’s investors are large institutions, some state pension funds, his concentrated risks don’t make for a logical investment strategy. Isn’t a smoother ride more important to your financial security and comfort?

While Ackman’s hedge fund has a history of making huge bets similar to this, a well known actively managed mutual fund with a previously good long term track record has been severely tarnished by Valeant as well. The Sequoia Fund previously had a record of outperforming the S&P 500 over many decades, even though their fund was not very well diversified. The current managers, who replaced the founder of the fund, invested more than 30% of the fund’s assets into Valeant at one point during 2015. This one investment has caused the fund’s long-term track record to crumble, as they are in the 90-99th percentile of large growth mutual funds over the past 1-5 years, and badly trail their benchmark.

The SPIVA study and the Valeant investing example above are good reminders that sticking to some basic, but not always followed investment principles are keys to your financial security and long term investment success.

As you consider your financial goals, you should make sure that you understand the strategies and principles that your investment advisor, and the money managers that they utilize, believe in and follow.

Do they make sense?

Are they the appropriate strategies and principles, with evidence to prove it?

Do their principles give you and your family the most likely chance to reach your financial goals, with a good experience along the way?

We can confidently answer yes to these questions.

If you are not sure how your advisor would answer these questions, we would be pleased to discuss this with you.



**Per WSJ, Ackman Tries to Calm Investors on Valeant, March 22, 2016.

Have You Noticed?

think positive



Have you noticed that…………

  • Most broad US stock market indexes have recouped nearly all of the January and February 2016 decline?
    • The media had headlines about the losses earlier this year.
    • Markets have recovered almost back to even for the year since mid-February.
  • Construction for new houses is strong?
    • Construction of new homes rose to a 5 month high in February, led by the biggest increase in single family homes in 9 years.
    • Permits and housing starts are at their highest levels since November 2007.
  • US auto sales increased in February 2016.  Auto sales for 2016 are on pace to equal or exceed the record pace of 2015.
  • If you ignore the negative political rhetoric, real economic data continues to show a strengthening economy and no sign of a near term recession.

We hope that you focus on the facts and not on the negativity of politicians.

This will help you to be more confident and financially secure.


Purely Personal…In Memory of my father-in-law

Silver Family 2
The world changed on Saturday, as my father-in-law, Alan Silver, suddenly passed away.

For the many people who knew Alan, the world became a little less bright. A little less fun.

Alan was not a famous person. There will be no long obituaries written about him citing tremendous business or philanthropic accomplishments.

But to those who knew him, there is a great loss, a missing puzzle piece in their life now. He was a good person, who was a very devoted husband, father, grandfather (“Papa”) and friend to so many people. He loved life and sharing it with the people he knew.

Alan had the right priorities. He lived the American Dream in his 73 years, as he provided a better life for his family than how he grew up. He cherished his daughters, his grandchildren, his wife and extended family. He spent nearly every Sunday in recent years with his two young grandchildren. As his older grandson, now 10, has learned and began to excel at golf, they became close golf buddies.

He was a devoted husband and cared for his wife Susan. While they lived a middle to upper-middle class life style, they made important decisions and sacrifices, to benefit their children. When my wife Felicia was in her teens and began to develop creative interests, they enrolled her at Cranbrook, a private high school with an excellent fine arts curriculum. When Felicia wanted to pursue a career in commercial interior design, they helped her to attend Pratt Institute in New York City for college.

Alan had an incredible and large group of close friends, many of whom he has known and maintained from grade or high school. Keeping relationships like that takes work and effort. To him, it came naturally. As I have gotten to know these friends over the past years, and even more this week, I am amazed at their warmth, caring and intellect. Just good quality people, who treat me like family. They know who they are and how much they mean to me.

When anyone needed help or something fixed, Alan was always willing. When close friends needed something fixed, they would call and say “Service.” And he would be there, tools in hand, day or night. On Sunday’s however, he said his fee was double. With a smile.

Alan loved food. Sunday dinners and barbecues were memorable. He was a master at the grill. He would not hesitate to drive miles with family or friends to try a new restaurant, visit a great bakery or search for the perfect slice of pizza. Even if meant getting lost or going into a dangerous neighborhood, the venture was worth it. Distance was no issue when it came to finding good food. That is a family tradition that will surely continue.

Alan loved gadgets and the latest technology. He was not always good at it, but he tried. Apple has lost one of their best customers. Alan recently bought his grandson a small drone with a camera, but he was just as likely interested to use it himself.

Alan was often impatient, frequently changing TV channels and driving others in the room crazy. He was an avid golfer and sports enthusiast. He loved good music and Detroit’s annual Dream Cruise. He had a passion for doing huge puzzles, which he framed after completion. This was his way of relaxing after his hours in the property management business.

When I entered their family a number of years ago, Alan welcomed me warmly. He was not a deep conversationalist, as his phone would constantly be beeping, ringing or buzzing. He didn’t actively engage in all matters, as the iPhone or TV were usually of more interest to him. But we all knew that he cared, and cared deeply, about those in his life.

Unlike others who suffer for months or years with an illness, Alan’s death came quickly and without much warning.  Unfortunately there was not the opportunity for a final “I love you” for those closest to him.  His vast circle did not get the chance to tell him how much he meant to them.  There will not be another round of golf, another vacation with friends or family or steak to grill.  There will be no 50th wedding anniversary celebration for him and his wife Susan, a few weeks from now.

So as cliche as this sounds as I write this….please take time today or this weekend and tell those you love and appreciate….that you do.  Do it often.  You will not regret it.

Professionally, we are financial advisors. Our business relationships focus on money. But the relationships become deeper and much more personal than just about investments. They are about people, their children, their grandchildren and their legacy.

Alan Silver is a reminder that there is far more to life than money and work. Alan worked hard, but enjoyed his life. He knew how to have fun, smile, share good times with people, enjoy food and the importance of family.

That doesn’t mean that you should not plan and save and consider the long term. It is hard for me this week to balance the many seminars and discussions I have about planning for 90-100 year life expectancies, after an event like this. But I know that good planning and longer life expectancies are also an important reality.

So please, tell the people you are closest to how much you really care about them. It may be the most important habit you develop.

Lessons from Warren Buffett which can help you

Warren Buffett’s Berkshire Hathaway Inc.’s Annual Shareholders Letter was released last Saturday morning. This letter has been a required reading for me for as long as I can remember. There are always lessons to be gleaned from his annual message which can help all of us to be better investors and smarter financially.

Berkshire Hathaway grew in prominence based on Buffett’s stock holdings of many large US companies during the 1970s through the early part of this century. Berkshire has grown due to these investments and their huge insurance companies. Over the past decade, he has focused more on buying large companies outright, as well as making many opportunistic investments, particularly during times of crisis, such as during the financial meltdown of 2008-09.

What are the lessons from Buffett that impact you and your financial life?

Focus on the long term positive progress, not on negative talk

After his opening summary of the past year, Buffett commented on the negativity that the current election year is having. While politicians continue to talk about our country’s problems, he feels “many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong. The babies being born in America are the luckiest crop in history.” I completely agree, as the constant political negativity weakens people’s confidence in our country. The economic strength reflected in real data is much more relevant than the political banter.

Buffett explained that output per American is about $56,000 (called GDP, or Gross Domestic Product), which is 6X greater than when he was born in 1930. While he acknowledges that there are certainly income gaps within our society which need to be addressed, the overall trend is clearly positive.

As our economic growth continues to expand, even at 2% per year, that exceeds the population growth of .8% per year. Over the next 25 years, he says that should lead to gains of almost 35% in real output per person in the US, or a gain $76,000 annually for a family of four.

He stressed the positive long term increase in the standard of living in the US. Buffett states that “all families in my upper middle-class neighborhood regularly enjoy a living stardard better than that achieved by John D. Rockefeller, Sr. at the time of my birth.” He cites advances, which many of us take for granted, in “transportation, entertainment, communication or medical services.”

Be positive and confident

Buffett is clear in his conviction to be positive about the future. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And yes, America’s kids will live far better than their parents did.”

We feel this confidence for the long term is critical to be a successful investor. We have emphasized that volatility and market downturns are part of stock market investing. Significant downturns happen approximately every 5 years. You need to be prepared for these, and be able to stick to your investment plan, to benefit in the long term rewards of stock market investing. Faith and confidence in the future are very important.

Keep investing, in good times and bad

Buffett continues to purchases companies, including a $32 billion aerospace components maker. He agreed to this transaction in August 2015, just as the market was declining last summer, and closed on the deal in early 2016, despite the market decline in January 2016. Berkshire’s various subsidiaries purchased 29 companies during 2015 for a total of $634 million (he calls them bolt-on acquisitions, as they add value to his existing subsidiaries).

Berkshire’s companies invested $16 billion in property, plant and equipment during 2015, of which 86% was in the US. His companies are clearly investing for the long term with the expectation of greater returns in the future, regardless of short-term unknowns and volatility.

Buffett has not been as successful recently in individual stock investments

Warren Buffett is clearly recognized as being one of the top investors of our lifetimes, as he has built an extraordinary conglomerate of companies and stock holdings.

In preparing this essay, I reviewed the top stocks he has held for many years, as well as some more recent acquisitions. The results are quite startling, and certainly not as spectacular as I would have thought. Of his top 4 stock holdings since 2005 and 2010 (the last 5 and 10 year periods), 3 of the 4 of these stocks have vastly underperformed the S&P 500, the index of the 500 largest US companies, which Buffett feels is the benchmark he is to be evaluated against.

His top stock holding in 2005 was Coca Cola. Since then, its 10 year performance was better than the S&P 500, but in the past 5 years, it has trailed the S&P’s 11% annualized gain by over 2% per year.

His current top stock holding is now Wells Fargo. Since he vastly increased his holding in Wells Fargo over the past 5 years, the stock is up 10.51% per year, on an annualized basis. Sounds great, right? However, that is nearly even with the S&P 500, so his Wells Fargo holding is really only equaling the benchmark.

His other large holdings have vastly underperformed. IBM, which he began accumulating in 2011, is still below his original cost and trails the S&P 500 by 11.5% per year over the past five years. American Express, which he has owned for decades, trails the S&P by 4%, 5% and 2% per year, respectively, over the past 5, 10 and 15 year periods. While not as large a holding, Buffett has accumulated $4 billion of Wal-Mart stock since 2008. Again, this stock has trailed the S&P 500 over the past 3 and 5 years by dramatic amounts.

What is my conclusion?

This shows how difficult it is to succeed over the long term in selecting and holding individual stocks. This data, while not complete for Buffett’s career and all his stocks, certainly shows that even for an “expert,” it is very difficult to vastly outperform the stock market, let alone even matching the index. Buffett’s major individual stock holdings have not done that in the last 5-10 years.

This is further evidence of why we feel so strongly about our investment philosophy of utilizing broadly diversified indexes, which track various benchmarks with extremely low costs. We are confident that our investment strategy is the best way to capture the long-term expected returns of the stock market with the greatest chance for success. As even Warren Buffett has recently shown, trying to pick a handful of individual stocks just isn’t the best approach.


Disclosure:  Brad Wasserman, author of this blog post, owns a small number of Bershire Hathaway shares, which was purchased to enable me to attend the Berkshire annual meeting.  All my other stock investments are in DFA or Vericimetry mutual funds, as we recommend to our clients.