The following core beliefs are the foundation of our investment philosophy.

Belief #1: ACTIVE MANAGEMENT CAN ADD SIGNIFICANT VALUE
Belief #2: ABSOLUTE RETURN STRATEGIES PROMOTE WEALTH PRESERVATION
Belief #3: VALUATION MATTERS
Belief #4: MARKET CYCLES ARE REAL
Belief #5: BEING DIFFERENT IS ADVANTAGEOUS
Belief #6: OVER-DIVERSIFICATION IS OVER-RATED
Belief #7: QUANTITATIVE ANALYSIS WORKS
Belief #8: INVESTOR PSYCHOLOGY FOLLOWS PATTERNS
Belief #9: HUMILITY IS KEY TO SUCCESS

ACTIVE MANAGEMENT CAN ADD SIGNIFICANT VALUE

“In any sort of a contest – financial, mental, or physical – it’s an enormous advantage to have opponents who have been taught it’s useless to even try.”

- Warren Buffett – pg 158, The Essential Buffett

Many industry professionals argue that active portfolio management is an exercise in futility because 70% of active investment managers under-perform their benchmark indices. We acknowledge that the market tends to be a “zero-sum game” in which, for every winner, there will likely be a loser. On the other hand, we are strong believers that skillful investment management can add serious value and consistency to portfolio performance.

ABSOLUTE RETURN STRATEGIES PROMOTE WEALTH PRESERVATION

“Offense Wins Games - Defense Wins Championships!”

Anonymous

Pardon the sports analogy, but this ideology is particularly relevant to investing. Our primary objective is to manage risk or, in sports jargon, “play good defense.” Our secondary objective is to search for returns. Conventional Wisdom asserts that outperforming the appropriate market benchmark is a good measure of successful investment strategy. However, if your portfolio slightly outperforms the market when the market is down 25-30%, should you be happy with your performance? The point is, the financial industry’s obsession with “relative return strategies” can be financially devastating.

We strive to achieve positive “absolute returns” by searching for investment opportunities that promise superior risk-adjusted returns and by avoiding investments that offer poor risk/return characteristics.

VALUATION MATTERS

“That’s how my mother invests!”

Jim Rogers in response to someone who was recommending an
over-valued stock that had just hit a 3 year high.

Humans are psychologically hardwired to chase investments that have already produced superior returns even when those investments are over-valued. This is a truth that Wall Street’s selling machine likes to keep secret from the investing public. After all, it’s much easier to sell an investment that has performed well in the past than to sell an investment that has performed poorly but has potential to perform well in the future. Valuation is at core of what determines whether an investment has positive or negative risk-return characteristics.

While the valuation of the broad US stock market is currently near historic highs, valuations of many segments of the World’s capital markets are hovering near historic lows. We adhere to basic tenets of “Value Investing” by focusing on investments with attractive valuations. We think this approach assures a margin of safety for our clients.

MARKET CYCLES ARE REAL

“History rarely repeats itself, but it often rhymes.”

Mark Twain

“Too many investors are so overcome by emotions of greed and the noise of the moment that they ignore the lessons of history.”

Larry Swedroe – pg 257, What Wall Street Doesn’t Want You to Know

Capital markets tend to move in 15-20 year secular (long-term) cycles. Since 1900, the U.S. stock market has enjoyed 3 secular bull cycles that were characterized by superior returns and endured 3 secular bear cycles that were characterized by lackluster returns. In each of the secular bull cycles, P/E ratios peaked in the low 20’s and in every secular bear cycle, P/Es bottomed in the 6-8 range. Bond markets also tend to experience similar cycles.

We believe that we are in the early stages of a secular bear market for U.S. stocks. We are also concerned about the prospects for the domestic bond market. The current climate for U.S. capital markets may prove challenging for buy and hold investors. While this outlook for domestic markets may peg us as consummate pessimists, on the contrary, we are quite optimistic that bull markets are budding in other capital markets. We are excited about specific international and natural resource markets.

BEING DIFFERENT IS ADVANTAGEOUS

“You cannot beat the crowd by joining them.”

Anonymous

“Nearly every time I strayed from the herd, I’ve made a lot of money”

Jim Rogers – pg xvii, Hot Commodities

“If you join the crowd, you have a much higher risk of being trampled.”

Warren Buffett – pg 214, The Essential Buffet

The crowd has embraced “Modern Portfolio Theory” (MPT) as the foundation for portfolio construction for institutional and individual investors alike. In a simple explanation, the theory prescribes a diversified portfolio of stocks and bonds and emphasizes a “long-term buy and hold” approach to investing. While MPT seems appropriate for institutional investors that can endure long periods of low returns on their portfolios, we question whether most individual investors have the luxury or the patience to take such a long-term view, particularly since domestic stocks and bonds may experience a protracted period of below average returns.

We have the courage to pursue non-consensus investment themes that will potentially enable our clients to thrive in this environment. We are confident that unconventional strategies will create exciting opportunities for attractive returns.

OVER-DIVERSIFICATION IS OVER-RATED

“Diversification is a protection against ignorance.”

Warren Buffett

A certain degree of diversification has its place in any portfolio. However, many financial advisors take diversification to the extreme. This propensity to over-diversify is driven by the need for professional self-preservation, an emotional desire to run with the herd, a lack of investment acumen or an inadequate devotion of time to investment research. Over-diversification can put a serious drag on portfolio performance and offer surprisingly little incremental protection.

Conversly, we welcome the challenges of a focused strategy and accept accountability for our results.

QUANTITATIVE ANALYSIS WORKS

“Irrationality creates enormous opportunities for those who have the ability to resist it.”

Paraphased from MoneyBall by Michael Lewis

Billy Beane, GM for the Oakland Athletics, is perhaps the best known Quantitative Investor. He used quantitative techniques to build winning baseball rosters where we use quantitative analysis to build winning investment portfolios.

INVESTOR PSYCHOLOGY FOLLOWS PATTERNS

“It’s impossible to predict the behavior of a single individual; however, it is easy to predict the behavior of a group of individuals.”

Dr. Kenneth McFarland

The market is made up of individual investors who collectively behave in somewhat predictable patterns. There are quantifiable methods to measure historical market behavior which can be useful in determining the probabilities of future market trends. We use technical analysis as tool to complement our fundamental and quantitative investment processes.

HUMILITY IS KEY TO SUCCESS

“A proud peacock one day, a feather duster the next”

Coach Rick Barnes, University of Texas Men’s Basketball

While humility is not commonly considered a trait of successful business persons, in investing it is critical to success. Humility allows us to:
1. Put the interests of our clients ahead of our own.
2. Be objective.
3. Learn from our mistakes.
4. And most importantly, learn from others.