Investment Process

Excellent  returns can be earned by investors who break from the investment traditions of "buy and hold" and age based fixed asset allocation. Our investment process breaks these dangerous industry traditions by:
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We do not believe that a "buy and hold" strategy works.  We also do not believe that allocating capital to a static asset allocation mix, like 60/40 stock/bonds, works.  These common strategies can dangerously expose investment capital to sustained periods where an asset class declines.  Our goal is to participate in the upside when asset classes rise, but more importantly, to have limited exposure to asset classes that are in sustained declines.  Being exposed to any asset class in a buy and hold or static mix strategy is not a way to preserve capital.  We strive to achieve better than equity returns with fixed income like risk by exposing investment capital only to asset classes that meet conditions for positive expected returns.
  
Our process breaks the investment world down into 6 broad asset classes – Cash, U.S. Equities, Fixed Income, Foreign Markets, Real Estate and Commodities.  Through our process of "Reading the World" we allocate investment capital across these major asset classes.  This process begins with a top down, macro view focusing on government policy and economics.  In these domains we continually make assessments about where investment capital will be treated best.  We utilize country, sector and style ETF's as well as individual company holdings to invest capital when we assess unusual opportunities.  Our approach imposes a strict sell discipline which reduces exposure to sustained asset class declines.

Summary

Investors with a 50 -100 year time horizon may have long enough to wait for asset class returns to normalize around their historical averages. However, “mere mortals” with retirement looming should only focus on an absolute return for their capital. Likewise, institutions and foundations with budget requirements must focus on an absolute return since poor market returns negatively impact both annual spending plans and the long term viability of organizations. Although the U.S. equity market has returned 8% per year on average, there are rarely average years or average decades. Prosperity and equity friendly policies cluster. Returns may be mean reverting, but they are not random. Importantly, the time for mean reversion may be much longer than the rest of your life. The market does not know it is seriously undervalued or that it fell more than 55% in the recent bear market decline. It is not a living thing nor does it know that it “owes” you a double on your investment capital. The market is simply a mechanism that prices future cash flows, and those cash flows are dominated by government policy. We do not fight the effects of government policy. We assess those effects across multiple asset classes instead of just using the S&P 500. We invest capital in those asset classes that are helped by government policies. We concentrate on absolute, not relative, returns. In the end, an absolute return strategy reminds us not to lose money, and that must be the first priority of any wealth building strategy.

 

Clearly the very best time to adopt our absolute return strategy would have been any time prior to 2008. The next best time is tomorrow. Markets will continue to rise and fall based on policy. We are clearly not in one of those moments like the early 1980’s when excellent policy collided with cheap valuations. 

For more on our investment philosophy, please see our articles Mean Reversion May Be Longer Than Your Life and Policy Matters Now Profit From It.