Sound Investment Counsel from the Experienced
It has been the practice of our two-man winter climbing team for 15 years to hire guides on glaciated adventures, and to go-it-alone on snow. We’ve paid guide teams to endanger us, and we’ve paid guide teams to save our lives. On one particular 5 day climb in 2011, the guiding policies were so irrational, we may have saved their lives! They were good people, and strong young men, practicing unsound principles. The investment tenets driving your investment decisions, or those of your wealth manager, are equally critical to your financial survival and success! Here are two fundamental principles to investing that are upheld by many of the most experienced investors in America:
Negative principle; something to avoid: Never allow your geopolitical or macro-economic views to impact investment decisions. Investors who do so consistently produce among the worst returns in the marketplace. Allow your perceptions of the broad picture to impact financial planning decisions, but never decisions aimed at growing capital. There are no exceptions to this rule.
Example: many friends and clients have recently expressed intense concern about the likelihood the U.S. dollar loses its world-reserve currency status, to the effect it should be impacting investment decisions. Not so! As Ian Bremmer keenly noted, “you can’t replace something with nothing”, and there is no viable alternative on the horizon today.¹ Investments made on the faulty premise the inevitable death of the global dollar must occur in the next few years will eventually turn woefully sour, even as disciplined investors continue to consistently make wise decisions and profit!
Positive principle: something to practice: Always be a buyer of a highly profitable business at a reasonable price. Warren Buffet, to express this point, suggests investors think of themselves as business owners, not stock pickers. Doc Eifrig, the top performing investor at Stansberry Research during his long tenure, often recommends the purchase of companies that a) show several years of consistent revenue growth, b) have return on assets (ROA) of 10% or more, c) have 10 consecutive years of dividend growth, d) have a net debt-to-earnings before interest, taxes, depreciation, and amortization ("EBITDA") ratio of less than 4, and e) have a price to earnings ratio (P/E) under 25.² What matters is that you have parameters that are tested and reliable, and that you follow them.
Example: retail investors are notoriously the worst investors on earth. They never buy into the stock market until very late in a raging bull market, and are the credited catalyst which ‘pushes’ stock prices to their peak and warns elite investors to protect their long-standing, massive gains. Later they methodically capitulate near the bottom of the following bear market, and resolve never to own stocks again. They are a group of highly emotional investors without a plan, trying to compete in a highly counter-intuitive marketplace designed to ultimately inflict the maximum amount of pain on the maximum number of investors. Track the retail investor, but make this powerful investing principle your guide.
May these two sound principles be a blessing to your investing efforts! Think about it, Shaun.
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” ~Warren Buffet
“Where there is no guidance, a people falls, but in an abundance of counselors there is safety.” ~Proverbs 11:14 ESV
1 Mauldin Economics, Over My Shoulder, “Ian Bremmer: The Dollar is Dead, Long Live the Dollar”, April 10, 2023
2 Doc Eifrig’s Health & Wealth Review, “Five Traits of Any Good Investment”, April 8, 2023
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
https://www.fivestarprofessional.com/spotlights/90982
Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.