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OUR INVESTMENT DISCIPLINE
As our research showed, a handful of investors have soundly defeated the stock (and bond) market, during good times and bad, in some cases for decades. The discipline the greatest investors follow was originally created by Benjamin Graham. Along with managing money, Mr. Graham was also a professor at the Columbia School of Business, where he taught a young man named Warren Buffett. Mr. Buffett has expanded and refined this discipline, becoming in the process the most successful investor in the country. Over the last 43 years, Mr. Buffett has more than doubled the gains from the stock market. And over more than four decades, his company has lost value only one year! This is the discipline we follow at Secure Retirement, and we have spent many years applying it to the management of diversified retirement portfolios.
There are five key principles to this discipline as it applies to managing portfolios:
- Don’t lose money. Retired investors usually grasp this principle right away. If not, they typically figure it out the first time their retirement account suffers significant losses. But the investing public as a whole is under the mistaken impression that you make higher returns if you take more risk. This is what we are all taught. Upon closer inspection, you find this is completely wrong. In fact, what most people don’t realize is that you make much more money over time if you don’t lose your money during market downturns. Over the last 43 years, Warren Buffett has delivered higher returns than any other professional investor, and his first rule is: Don’t lose the money!
Controlling risk is also our first principle at Secure Retirement. We use the most advanced mathematical tools to calculate the risk level in your portfolio. We then select funds and stocks managed by investors who have a long and highly successful track record of avoiding risk.
- Only trust your money with unusually talented people. At Secure Retirement, we will not invest a penny of our clients’ hard-earned retirement money in over 99% of the mutual funds available. Instead, we search for remarkable investors. While Warren Buffett is our first example, through our research we have discovered a small group of equally talented managers.
- Do not “over-diversify.” Most professionally managed investment portfolios contain far too many mutual funds, stocks and/or bonds. As Warren Buffett has said, being over-diversified is a way to hide the fact that you do not have the ability to spot real value. Instead of investing in 15 or 20 mutual funds, or dozens of individual stocks, we only use the very best. We then allocate a larger percentage of our portfolios into these superior selections.
- Hold superior investments for a substantial time period. Patience is a key to making money in the stock market. Once you have found the best investors, you must give them time to do their job. Instead, most people sell things that haven’t gone up as much lately (selling low) in order to purchase whatever has gone up the most recently (buying high). If the investments they sold were of the highest quality, invariably they find these going up – usually soon after being sold – while the new, overpriced purchases typically go down.
- Ignore the short-term movements of the stock market. We all know the stock market goes up and down. However, it has gone up approximately 75% of the (rolling) quarters since 1928. At the same time, not one person we have ever found knows if it will go up next week, next month, or next year. In order to be a superior investor, it is essential that you ignore the things you do not and cannot know. This allows you to focus your attention on the things you can and should know.
At Secure Retirement, we do not know what the stock market will do on a short-term basis, so we ignore the massive amount of extraneous “noise” made by people who mistakenly believe they can tell the future. But we do know which investors are the most talented. We also know they have an unrivaled track record of avoiding loss should the market go down. And we know how to create portfolios at precisely the correct risk level for you and your family.
There is, however, one time period in which we can consistently predict the future of the market. Whenever any asset class becomes a “bubble,” that market will eventually suffer large losses. While this sounds obvious, in practice it is quite the opposite. By definition, assets only become bubbles because the vast majority of investors believe they will continue to go up.
The most recent bubble we have experienced was in residential real estate (and mortgages). At Secure Retirement, we told our clients this market was going to go down over two years before the decline began, and we structured our portfolios to avoid the losses we knew would inevitably come. Similarly, near the end of the last stock market bubble, Warren Buffett was the only CEO in the country we know of who told investors to stop putting money into stocks – including his own company Berkshire Hathaway. At the time, nearly everyone said he clearly did not understand the “new economy” that justified stock prices at nearly any level. The main stock market index (the S&P 500) proceeded to lose over 40% of its value from 2000-2002, while Berkshire Hathaway went up 29%.
At Secure Retirement, we will not participate in asset bubbles. Please note this does mean we may underperform occassionally. When others ignore the underlying value of assets, blindly driving up prices far beyond their fair value, we will pull back or exit that market. This may lead to lower gains – for a while. But bubbles all end, and by avoiding them, we help our clients avoid the large losses that follow.
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| We have one final recommendation for you: carefully follow this discipline. This is what we do at Secure Retirement, and it has resulted in our clients attaining financial peace of mind throughout their retirement. |
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