By: Paul Sutherland, CFP ®
Years ago I was chatting with a very successful investment manager who was much my senior, and I asked him, “What one thing would you change [about our business] that would have more positive influence on your performance?” He sat and thought awhile, and with a big smile he said, “Paul, if I only sent out progress reports every five years, it would improve our performance [dramatically].” Warren Buffett said it another way: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” During those five years, you would continue to collect dividends, participate in any growth in the company’s dividends and, if need be, you could sell your shares. How might you sell shares with the stock market closed down? Businesses are bought and sold every day. In fact, more transactions happen off Wall Street fall sharply and to sell wisely when they advance a great deal. At other times, an investor will do better to forget about the stock market and instead pay attention to both dividend returns and the operating results of the companies.
Darkest Before the Dawn
When I think about the deficits, debts, lack of virtue, general economic malaise, indifference and short-term thinking that’s rampant in many parts of the world, it’s easy to become pessimistic. However, when I look at the prices of investments – especially those in FIM Group’s portfolios – it’s easy to become optimistic. Who isn’t aware of the problems we face? My hunch is that there are few investors that simply don’t realize that most investments had a rough 10 years. These few probably also don’t realize that many investments performed respectably over the past 10 years. What’s important is that the price of investments has gone down to reflect this “known” risk. In other words, many investments – like stocks and bonds – are priced to compensate well even if the world’s economy stays stuck in neutral (or worse). Even during the Great Depression many businesses survived, and some thrived. The ones that survived had identifiable characteristics – they were in good industries, had solid balance sheets, had good management and provided needed services and goods. We expect a bumpy ride for the world economies. Profits will be made, and dividends and interest will be paid as countries retool and adjust to the “new normal,” as some have called our current economic climate of slow/no/modest growth.
I am confident that we’ll look back on this time in five or 10 years as a golden opportunity. Opportunity is only relevant for investors if it is acted upon and realized ahead of time. Prices are great, I am optimistic and believe we are in for 10 years of significant investment returns.
The Long View at FIM Group
FIM Group exists to help our clients. We manage investments and provide advice that helps our clients achieve their financial goals. We do not exist to help people speculate or get rich quick. Rather, we follow the mandate that is best communicated by our company mission statement: Our priority and commitment at FIM Group is to provide our clients, employees, business partners, service partners, shareholders and other stakeholders with real, tangible, positive, quality, sustainable performance. We want excellence that is transparent and measurable both qualitatively and quantitatively at all levels with performance that can be measured, delivered with common sense, uncompromised integrity, ethics, leadership and care. Our goal is to have all of our stakeholders grateful that we exist, and to humbly use our skills and resources to create an environment, strategy and actions designed to ensure we meet our priorities and commitments. To accomplish this at all levels we ask ourselves, “How do I [we] serve our clients best?” Then we must execute our strategy with education, training, behaviors, systems and structure.
As a private family-owned company, we can have a long view. We do not have public shareholders pressuring us for more growth in revenues or to take on new business that might get us off track in serving our clients’ best interests. Our values dictate that our goals are aligned with our clients’ goals. We are not tied to an insurance company, broker dealer or bank that is pushing us or incentivizing our team to push behaviors that are benefitting themselves versus their clients. FIM Group employees do not work on commission. We do not earn bonuses for bringing on new clients, and we receive no kickbacks or incentives for referrals. If you do any research on the general practices of the “financial advice business,” you will find it is rampant with commissions, incentive kickbacks and referral fees.
FIM Group’s structure and firm policies do not allow such behaviors. Kickbacks and commissions are inconsistent with our mission and definitely out of compliance with the statement, “How do I [we] serve our clients best?” If you look at the stagnation and lopsided state of affairs in today’s economic world, it has much to do with the ethical void created by a system that at its core gives incentives to “game” the way money flows through the investment world. The system works to benefit the large corporate entities rather than the average customers that they’re supposed to serve. This is changing. Statistics show that the largest percentage of job growth is in small entrepreneurial startups and smaller established businesses. In my opinion, smaller organizations are closer to their customers and do not institutionalize the business in such way as to lose touch with their customers’ real needs. They also don’t have shareholders demanding dividends and profits. Bottom-line profits are important, but they should come from serving clients and customers with integrity and honor.
By: Jeff Lokken, CFP®, ChFC
There are many reasons why history fascinates me. Particularly I am amazed at how quickly things evolve in the modern world aided by lightning-fast Internet capabilities and wireless communications. It took almost 150 years for text messaging to advance from using Morse code on telegraph machines to Interactive Voice Response via smartphones and other pocket-sized devices.
In 1995 Bill Gates penned a book titled The Road Ahead. In this insightful work, he explained how the Internet was going to transform our lives. He theorized that Internet bandwidth would dramatically increase, allowing almost any form of digital data to transmit. I remember commenting at the time that someday we would watch movies and TV shows via this technology. In the span of just a few years, we have evolved from driving to the closest Blockbuster video store, walking the aisles for an hour, selecting a movie by reading the description and, after viewing, valiantly remembering to return it within 24 hours to avoid receiving the dreaded late fee. Now we can simply turn on our TV, computer or smartphone and find a movie to watch on demand. The new reality is that things change, and they change very quickly.
The “increased speed of change” trend has had a major effect on doing business, especially for those who invest. Risk will continue to be a factor in the future of investing, and effective investment management must work to manage this risk. Consider a more historical perspective: In the late 1960s there was an investment “strategy” known as “Nifty Fifty,” which referred to 50 popular large-cap stocks on the New York Stock Exchange. The Nifty Fifty companies were considered high-quality and good prospects for earning growth. You could invest in these companies at lofty value of 80 to 90 times their earnings. The Nifty Fifty strategy, however, turned out to be a major mistake. In the early 1970s, inflation reared its head along with the oil embargo, and the Nifty Fifty stocks dropped to trading at 8 to 10 times their earnings. The Nifty Fifty companies were great, well-established businesses, but investors who overpaid for them experienced significant financial loss. This happened again when the Internet bubble popped in 2000 and again in 2007/2008 when residential real estate prices crashed.
What should investors learn from these historical references? If you overpay for an investment you will certainly get hammered. Risk should not be managed by trying to predict the future, only buying quality or buying good expected earnings growth. Risk is best managed by not overpaying for an investment. This is the standard for value investing, and it is much easier said than done.
What follows are several ways FIM Group works to not overpay for an asset:
- We analyze each company’s earnings, cash flow, assets and liabilities. Perfect, reliable analysis can be difficult, but it helps us see the real issues and lets us accurately assess the intrinsic value of the company. If a company’s intrinsic value is more than the market price, it makes the potential buy list.
- We are contrarian. The crowd is often wrong, so we must research and invest in those companies not in the headlines.
- We don’t choose the companies we invest in based on feelings, emotions or other psychological influences. Rather, we follow investment criteria that are characterized by flexibility, discipline, and comprehensive, unbiased analysis.
- We remember that everything is cyclical, and the swing from pessimism to optimism and back is reality, and can be very quick. We must be the most careful when optimism is the most prevalent and be willing to buy when pessimism is the most prominent.
- We never extrapolate trends. Because earnings of a company increased the previous year, we cannot assume it will continue indefinitely. Earnings growth, as most things, is not linear.
- We diversify. We feel owning many companies in many countries of many currencies is essential for investment returns.
- We are patient when the price of a company drops below the price we paid. It can take the market some time to discover the value we uncovered.
History is very helpful when considering how to mange investment risk. The repetitive mistake made by investors has been to overpay for an asset. Managing risk is best done by consistently not overpaying for companies when buying and always selling when they become too expensive.
Fortunately, FIM Group advisers are knowledgeable when it comes to managing our clients’ assets. We believe that investing is a long-term process that requires discipline, patience and dynamic thinking … all of which leads, of course, to growing your wealth.
There is no Spotlight for this issue.