All of our services are directed toward managing your portfolios. In order to apply our skills to your funds, here are the steps we take:
1. Develop Understanding of Your Plans
Setting your account's investment direction is done in collaboration with you. We spend time analyzing your situation, both financial and psychological, to help you make an appropriate decision. As our motto states, "matching assets to plans in a low risk style," we seek to understand your plans, that is the goals and commitments that you have. We call these plans liabilities, because the root of our investment approach is technically called "asset-liability" matching. We believe that the better your investments are rooted in your plans, the better your outcomes will be.
The basis for funding your plans lies in savings, time and return. Saving, saving early and investing well are all critical to a successful outcome.
2. Identify Separate Investment Accounts
Our services are delivered one account at a time. We do not commingle your accounts with those of others. The separateness of each account is created and maintained by individually "holding" assets. We assist in the selection of an independent, "third party" custodian for the"holding" of your account assets. Subsequently, we submit management decisions to these custodians for execution. This "separateness" not only creates clear accounting and record-keeping, but also prevents exposure to the sometimes irrational decisions of others (such as high volume trading). In addition, it allows for flexibility in accomplishing unique goals, such as continuing to hold investments with low cost bases.
3. Identify Tax Status of Accounts
Each of your accounts has a tax status dependent on a variety of factors. After we have identified your account, we identify the tax status of that account. Basically, an account will either be taxable or non-taxable. If your account is non-taxable, there are often requirements to meet to maintain that status. We seek to make sure that our activities (such as titling, investing or distributing) comply with appropriate regulations. If an account is taxable, we seek to ensure that the custodian is generating the appropriate tax information for you or your accountant. While we do not compute or file tax returns, we do assist you where we can.
4. Outline Strategic Asset Allocation Options
After we have worked with you on the preceding steps, we outline for you what options are available. Studies have shown that up to 90% of your portfolio's return may be attributed to "strategic asset alllocation." "Asset allocation" refers to what kind of investment you have chosen, such as stocks or bonds or others."Strategic" is a more technical term, but basically means (using the analogy of driving) which long-term road you take, as opposed to which lane or driving tactic you choose.
"Strategic asset allocation" is the big picture. Click here to review the high impact that it has had over the last eighty years. This long-term graph of results shows that being a common stock owner has resulted in a greater net worth than bonds or simple savings. However, common stocks, like owning a business, can create some sleepless nights.
As the financial environment increases complexity, more asset options have become available. Despite this increasing array of asset options, we stick to our core competencies : US Treasury instruments and US-exchange listed common stocks. We believe that the range of businesses we study can provide adequate exposure to commodities, currencies and international business while at the same time putting those exposures in the hands of narrowly-focused business managers.
5. Set Strategic Asset Allocation for Account
The asset allocation options result in one of three account types:
Fixed Income Accounts - These accounts are invested in US Government guaranteed money market accounts or US Treasury instruments with 0% common stock exposure.
Balanced Accounts - These accounts are invested in a combination of US Treasury instruments and US-exchange listed common stocks with a maximum of 60% common stock exposure.
Equity Accounts - These accounts are invested in a combination of US Treasury instruments and US-exchange listed common stocks with a maximum of 100% common stock exposure.
6. Discuss Dynamic Asset Allocation
The term "dynamic" asset allocation describes opportunistically reaching our asset allocation. For example, if we set the strategic asset allocation at a maximum of 100% common stock exposure, we do not necessarily reach that level quickly or, having reached that level, stay there. Instead, we move opportunistically between 0% and 100% common stock exposure. In this "dynamic" asset allocation, we do not define these opportunities by looking at the general levels of market indicators nor do we attempt to forecast the future. Instead, we look at the pricing of individual bonds or stocks. If we find that the pricing is attractive, we take our exposure higher and, conversely, lower our exposure if pricing is unattractive. This flexibility gives us another oppportunityto reduce your risk while increasing your return. When it comes to this "dynamic" level, we make decisions one small piece at a time.
7. Sign Investment Policy Statement
Your Investment Policy Statement sets these prior steps in stone by documenting the strategic asset allocation and the flexibility built into our dynamic asset allocation. Your Investment Policy Statement begins by stating your desired investment objective followed by directions on asset allocation. Both you and a member of our firm sign your Investment Policy Statement as an indicator of the mutuality of the process. As circumstances warrant, we go back through these prior steps and amend the Investment Policy Statement. We also specify the date on which we begin management so that you can judge our results.
8. Sign Investment Advisory Agreement
After setting your account's investment parameters, you and a member of our firm sign an Investment Advisory Agreement that sets our compensation. Our fee is based on a "percentage of assets"managed. While "percentage of return," hedge fund style compensation agreements have flourished, we believe that these agreements can provide an incentive to excessive risk. A "percentage of assets" fee aligns our interests with yours and has worked well to generate the basis for long-term relationships. In addition, the Investment Advisory Agreement provides the custodian of your funds directions on the limits of our investment discretion, as a kind of "check and balances" system.
9. Select a Custodian
Your custodian "holds" your assets in a safe place, assists in transactions and provides important tax and record-keeping services. We do not custodialize your assets, but require you to select a custodian with whom we can work. If you do not have a custodian, we will assist in the selection of one, based on safety, cost and service. Many fraudulent situations have occurred because of a lack of separation of advisory and custodial functions. A separatec ustodian is one more way to provide for the safety of your assets.
10. Build Portfolio
How do we select common stocks for you? First we pay attention to the capital structure. In our parlance, debt is a four-letter word. We have seen and experienced the challenges of companies shouldering excess debt; rarely does it turn out well. Second, we only invest your funds in the common stocks of companies which we believe we understand. "High tech" companies are, by their nature, more difficult to grasp and, thus, less likely to be purchased. Third, we pay attention to competitive structure.Nothing is more destructive to long term investment results than brutal competition. Capitalism competes to zero profits in a relentless effort to improve quality at lower prices. While consumers enjoy this process, the process is hazardous for investors.
After identifying the common stocks of companies with excellent long-term characteristics, we price them. Pricing is at best a general process. Rather than attempt precision, we employ several different general approaches to pricing, such as comparative pricing, historical pricing, industry pricing and a "sum of the parts"pricing. We also look towards longer term time horizons in order to avoid the pitfalls of short-term thinking. Once we have arrived at a reasonable price, we take a significant discount in order to provide for a margin of error.
What we don't do is just as important as what we do. We don't attempt tomake macro-economic forecasts, although we do attempt to understand the current macro-economic environment. We don't utilize Wall Street's forecasts, although we do pay attention to the group's "consensus" understanding and how we may differ. We don't attempt interest rate forecasts, although we do try to understand the impact higher or lower interest rates may have on our investments. In all of these endeavors, we draw a heavy line between what we can understand and control and what we can't.
After the purchase of a common stock, we do not participate in the "rent-a-stock" culture. Our common stocks are held for years, rather than minutes. In fact, we have often quoted that the real test of an investment is whether we would be happy we were never able to sell it. For this reason, we do not pay attention to short term earnings trends. Rather, we pay significant attention to such issues as corporate governance and the structural health of markets. In building a portfolio we generally follow a rule of having between 20 to 30 stocks in an account at any given time. This provides adequate diversification without becoming unmanageable. At times, we may emphasize bonds and money markets if stocks are priced unreasonably high.
11. Monitor Portfolio
Our portfolios are designed to meet your objectives. As time passes, we regularly subject our portfolio investments to scrutiny against any changes in your objectives or general investing conditions. If the investment characteristics have changed, we communicate with you and make adjustments. The investment world is subject to significant short termvolatility, both in terms of price and earnings. However, over the longer term, these volatilities tend to cancel each other out. Thus, patience and non-reactive behaviors are rewarded. However, longer term patterns often emerge that warrant consideration. These may be in the form of a bubble, as occurred in the housing area, or in industry trends, such as the effects of technology on the newspaper sector. Such patterns are important to monitor and respond to by maintaining perspective.
Beyond Growing Money
We recognize that your account fulfills an important role in your life. Your assets may be set in the context of the amount of money required for retirement income, but are important for gifts to your family or a charity. This is the "financial planning" aspect of money. For those who are pre-retirees, this involves setting appropriate goals for saving as well as investing. The monthly savings that one sets aside over time dramatically affects the standard of living that accessible in retirement. For post-retirees, this planning role includes understanding income needs and tax treatment. We recommend those not equipped to do their own financial planning to hire a qualified financial planning professional in conjunction with our portfolio management services.
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