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.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *