Quote of the month:
“When it comes to your investments, you remember the quality long after you forget the price.”

"Flash Back Time"

In our last Opinions and Facts, we pointed out that the Baby Boomers planning to retire should make sure that they are fully funding their 401(k)’s and/or IRA’s. There are some interesting statistics regarding the Baby Boomers we quoted in our last issue. For example, one third of the Baby Boomers have saved nothing for retirement and apparently are counting on Social Security. As I began to review this last issue, I began to wonder what I was telling people in our newsletters some 15 years ago.

After wondering about it, I dug out all my back issues from 1989 and began to scan some of the items and columns that I had written. I quote you now from our October 1990 edition of what was then called Facts.

..."But Mr. Hardgrove, I need my BMW…"

According to Dr. Macnimerra, it is absolutely essential for “Baby Boomers to begin a monthly investment program in addition to pension and/or IRA investments if they plan to have any fun at all in their retirement years.”

Well, there you have it. We’ve been saying the same thing for 15 years! And it’s truer now than ever.

And Now What About Risk?

Capital deposited into a fixed return investment does not grow in value. The only thing that happens is that interest is added to the principal, interest is compounded and as this happens, only the interest appreciates, simply because more interest is added.

The value of the capital, when the inflation is applied, depreciates. A historical study of economics will show us that during the days of high interest rates, banks were paying 15%,16%, and 17% on CD’s at the same time the news (on page 7) said that inflation was raging at the tune of 12% to 14%. So the people who’ve loaned their money to a (bank or a credit union or a fixed annuity company) have basically made sure the principal dollars were still there but they have no hedge against inflation that has continued, really since the beginning of time. After all, isn’t money only as good as to what it will buy?

This is why, as we have pointed out in past articles, that no matter what your Social Security fund is funded with (treasury bonds, stocks, or IOU’s) unless we have workers and technology to produce the goods for a “Retired Generation”, the cost of these goods will increase (inflation).

"Joe, you got off the subject! What about risk?"

One thing that most of our clients have learned is that there is no such thing as zero risk over the long term. Each of us has a special propensity for risk. No two human beings have equal feelings about financial risk. This is where we hope to be of help to you, our clients, by helping you to define your particular comfort zone. If you are uncomfortable with the risk zone you are in, give us a call. It’s important that you are aware of what risk really is, because you see, there are two kinds of risks besides investment risk and inflation risk: short term risk and long term risk. Short term risk has to do with the volatility of the market. Long term risk has the risk of inflation outstripping your deposits into fixed accounts.

"Hey! I came out pretty well during the bear market."

Fortunately for us, the greater number of our clients were well positioned during the market down turn at the turn of this century. Our clients have educated themselves to the point that they have held, and even increased their mutual fund holdings during down times. This, of course, is the best time to do it. However, as we pointed out in our last Opinions and Facts, the toughest time to do it is when things are fairly flat and fluctuate a very small amount. People then begin looking for something that they dream about… an increase of 15 to 18% per year, which they enjoyed in most of the 90’s. So when they discover that their assets are not averaging those high double digit returns, many people and organizations go out further on the risk spectrum and look at things like speculative real estate and hedge funds. These vehicles, along with unproven oil and gas deals, can certainly appear attractive. However, we have discovered after four decades of observation, most of the mistakes that investors make is their investments are based on emotion: fear or greed. Either the investor makes the mistake or his advisor does. Which culprit are you trapped with? Fear or Greed?

First, let’s agree what real risk is. According to our friends at Capital Research, most investors might define risk as follows:

"So what have you found that works, Joe?"

Step 1.
Eliminate managers that haven’t produced consistent long term investment results with low relative volatility.

Step 2.
Learn about the investment approach behind the numbers. “You can’t buy the past record, but you can buy the process” used to establish that record.

Step 3.
Be sure the managers do their own research and operate globally. Buying other people’s research is a crutch mediocre managers use.

Step 4.
If you are concerned about the short term (quarterly or one year), don’t invest with managers who operate on a long term view. In most cases the value of a company is not the same as the price of the stock. If your view is short term, you’ll not be happy with long term managers.

Step 5.
Be sure your managers are not participating in “their first Rodeo.” We think their average tenure should be at least two decades.

Step 6.
Don’t over pay for management. We believe that charges of less than one percent of the assets being managed is quite reasonable. If you’d like more detailed information on our approach to investing, just call. We’ll be happy to send you a brochure that covers our philosophy.

We believe that it takes in-depth research of companies by professionals to uncover the hidden gems of wealth creation and preservation. The long term view says not “Where will this stock be in a year”? But “Where will this company be in five years”. That’s the story of long term investing and it’s what we’ve been saying since the 70’s.

Opinion

I had a recent conversation with a long time colleague by a phone call to his Retreat in the Mountains. PMB, aka Dr. B, was relaxing amid cooler climes. His was the first Hedge Fund registered with the SEC (1974). Later a seller of that fund to a New York money manager, Dr. B was waxing philosophical when he said, “Joe, you and I may be the only two people in the country who don’t have a Hedge Fund.”

After each of us, preaching to the choir, went through all of the pitfalls of Hedge Funds: High fees (2% of assets annually, 20% of profits); unregulated; free wheeling; not 100% reported to data bases to check performance; we decided we were both fortunate not to be involved with Hedge Funds.

We believe that as the industry grows and substantial cash flows into these ever growing number of funds profits will be hard to come by. And 20% of those profits go to the management.

"The very success of the Hedge Fund industry in attracting funds is likely to make Hedge Fund investing an even less profitable investment strategy in the future. Let the buyer beware."

The Wall Street Journal 7-26-05

And we agree, Caveat Emptor.

That’s my take, yours is welcome.