Why write out a list of investing principles? We are looking for like-minded individuals to co-invest with us, and at the same time, work together towards meeting life goals.

We use a common set of principles to help us pull in the same direction. The market is an engine of volatility that constantly tests an investor’s convictions. Without an anchoring set of principles, it is incredibly easy to fall victim to behavioral biases and drift away from the main goals.

The human brain is hardwired to buy at the top (greed and FOMO) and sell at the bottom (fear and capitulation).

A written set of principles provides a common language for managing personal wealth. Without a mooring ships at sea are at the whims of the wind. We seek to be grounded and intentional investors. Principles help us accomplish our goals.

As such, here are principles that convey much of our thinking:

1. We do not manage stocks. We manage the needs of our clients lives. Investments play a significant role.
2. The stock market is not a “valuation” mechanism. Rather, it is a liquidity mechanism. Depending upon the mood of the markets, you can experience tremendous volatility in pricing….that has nothing to do with fair, long-term valuations.
3. If clients want to discuss the value of their portfolio or an individual stock, we will do so, but only if we can have a discussion about the sales, cash flow, earnings, margins and debt levels of their individual businesses. Fundamentals are what matters in the long run.
4. Our clients who generally experience the best long term returns are the ones who continue to put more money into investments in all markets—whether good or bad. This is the concept of Dollar Cost Averaging. You cannot try to time the market and you must be willing to invest when the market is at peak levels of pessimism.
5. According to DALBAR, over the past 30 years the S&P 500 produced gains of 9.81% per year. However, the average investor only received 6.13% per year over the same time period. Why? The average investor buys high and sells low chasing after the emotional decisions.
6. Studies by Nobel Prize winner, William Sharpe, show that market timers must be right 82% of the timejust to match the returns of an investor with a buy and hold strategy. Additionally, market timers incur approximately twice as much risk or volatility as the buy and hold strategy.
7. Historically, 100% of market returns came from 2% of the days. That means 98% of the time, the market has very modest increases or decreases.
8. Since 1834 the stock market has averaged about 9.6% per year. Also, it has incurred volatility (as measured by standard deviation) of about 17% to 20% per year. This means that on any given year you should reasonably expect your returns to be in a range of -10% to +30%.Although the average is 10% per year, the typical year is rarely average.
9. Investment returns in excess of 20% to 25% annualized are unsustainable. Regression to the mean is a powerful force.
10. Discipline is the premier investment virtue. Discipline is what keeps us from reacting impulsively and emotionally to what happens in our portfolios. It is a willingness to stick to a strategy during those temporary times it may be out of sync with the market.
11. Although a stock certificate may be printed on a piece of paper, it represents much more. Whether you buy one share of stock or many shares of stock, you must function as if you own the entire company. Quite simply, that is what stock is—ownership in a company.
12. The stock market is a long term proposition—meaning a ten plus year commitment. Even if you are 65 years old and are retired you should be a stock market investor with an appropriate amount of funds for the remainder of your life (which statistically is a very long time).
13. If the daily volatility of the stock market is affecting your current standard of living then you have your assets invested incorrectly. The stock market should be utilized to produce long term (10+ years) growthin assets. Fixed income assets (C/D’s, Bonds, etc.) should be used to satisfy short to intermediate cash flow needs. Correctly assessing this balancing act allows you to be a disciplined long-term investor.
14. Assume your dream home is selling for $1 million and one day some guy on the TV says that because of a variety of scary sounding issues this dream home is now only worth $400,000. Most logical people would assess this discount as an opportunity to be pursued and buy their dream home. Only in the stock market do we witness people get negatively excited when the prices of good quality companies are cut in half. I suppose this is due to people’s aversion to volatility and their inability to properly analyze the true value of a business. You must separate fear from opportunity.
15. Over the past 50 years the broad stock market has lost as much as 35% in any one year and, over the same time period the stock market has gained as much as 56% in any one year. The average of these one year time periods has been 13%.
16. Over the past 50 years the worst performance of the stock marketover any five year time period has been a loss of 3.2% per year. The best five year gain has been 27% per year. The average of these one year time periods has been 11%. Time is your friend when dealing with the stock market and its short term volatility.
17. Over the short term the stock market is merely a popularity contest that is quite irrational in nature. Long term, however, the stock market is a weighing machine which weighs the value (earnings) created by good companies that consistently increase their earnings.
18. While the date of December 31^stmay have some meaning to you, it has no meaning to your investments. Do not become overly concerned with your investment performance as of this date or any other arbitrary date (month, quarter, etc). Long term performance is what matters.
19. Volatility and controversy create fear as well as opportunities. To take advantage of this you must embrace volatility and have a strong stomach.
20. We own stocks personally and on behalf of our clients. We do so to participate, as owners of these companies, in their increasing pool of earnings.
21. In the past, we have made some predictions or warnings about the stock market. We warned about tech stocks in 1999. We warned about real estate in 2004. Although we were ultimately proven right, it still took time (often years) for these predictions to play out.
22. Although the financial news focuses heavily on the stock market, we do not obsess over it. We consistently evaluate all investment categories relative to one another. However, stocks typically provide us with the best opportunities to outpace taxes and inflation.
23. Inflation is a silent killer. You will never receive a bill for inflation and yet it has a bigger impact upon your assets than virtually anything else. With great consistency, the things we buy (food, energy, housing, etc.) go up in price. If your assets do not outpace taxes and inflation you lose purchasing power.
24. Over the past 50 years, a ten year U.S. Treasury bond (a default risk free investment), has produced returns of about 6% per year. However, after factoring in taxes and inflation, the return falls to 1.8%…..a 70% reduction. Therefore, after factoring in the effects of inflation and taxes this seemingly “risk-free” investment actually guarantees mediocre returns.  Bottom line: this safe U.S. Treasury bond investment can produce horrible long term results.
25. Many of our more conservative clients experience unrealized losses (even if modest) in their accounts from time to time—not because of their stock market assets, but because of their fixed income assets. Investors must realize that when interest rates rise, bond prices will decline. Fixed income assets do not deliver the “safe” returns that many expect.
26. For quite some time we have discussed the need for foreign exposure. We live in a large global world and as such want our clients to participate in global capitalism. Most of our clients own stocks that sell more than 50% of their products outside of the United States. This provides us with tremendous international exposure via large mature and stable companies. This approach provides clients with substantial global diversification.
27. Most financial magazines, newspapers and TV shows are designed to sell advertising, newspapers etc.—not individually customized financial advice. Jim Cramer of CNBC’s Mad MoneyTV show is an entertainer. His show is designed to elicit emotion and entertainment—not sound investment advice. Cramer’s ridiculous “Lightning Round” method of choosing investments is the financial equivalent of Russian Roulette—entertaining, but potentially catastrophic.
28. All of our clients are different, with different goals, income needs, volatility constraints etc. To satisfy our client’s needs we constantly evaluate all types of investments for relative valuation, liquidity needs, income requirements, time frames, etc.
29. We are honest with our clients even though it may not be what they want to hear. Our job is tolook out for our clients with integrity and discipline.