My Investing Philosophy in a Nutshell



Later today I will be appearing at the Strategic Investment Conference to discuss my investment philosophy. It’s a great group that includes Stephanie Link of Hightower, Brian Lockhart of Peak Capital Management, and David Bahnsen of the Bahnsen Group.

I have been trying to find the right way to present my ideas – a challenge considering 1) Its Alpha-seekers and me, and 2) Time is short on any panel. So I expect to be the outlier, the proverbial fly in the ointment.

Regardless, I needed to organize my thoughts for this event, and so I created a useful list of my basic investing philosophy:

1. Stock picking is exceedingly hard: The academic data overwhelmingly demonstrates that the vast majority of Alphas chasers underperform the indices after a few years. After 10 years net of fees, there are practically zero outperformers. We know the names of people like Ron Baron and Peter Lynch and Warren Buffett not because they are typical stock pickers, but because they are the rare outliers.

2. Market Timing is even harder: There are many reasons why, but perhaps the most compelling is that the biggest up and down days tend to be clustered near each other. Overbought conditions lead to sell-offs aka (lol) profit-taking; oversold conditions lead to snapback rallies, but the long-term trend is where actual capital gets compounded.

3. We are oblivious to our own cognitive shortcomings: Just as most drivers believe they are above-average, so too do most investors believe they can generate alpha. We are over-confident, cannot distinguish between luck and skill, and generally have a high opinion of ourselves. Other managers that do well w3as due to their lucky breaks, but our great trades and market calls are obviously due to our own brilliance.

4. Behavior is the biggest determiner of investor returns. This is the most important point I hope to make today: Do you chase the hot stocks or managers during bull runs? Do you panic and sell during volatility? How investors behave has an enormous impact on their long-term returns – far greater than either stock picking or market returns

5. Consistent average returns turn into above-average returns over time. Howard Marks has discussed why typical managers who finish in the top 10% in any given year underperform over the long haul. They tend to be narrow and specific, and their sector/style/region goes in and out of favor. Bouncing between the top and bottom deciles is not a formula for long-term performance. Instead, consistently achieving a modest target in the middle will eventually turn in top quartile returns (or better).

6. Tax alpha: For non-qualified accounts – not 401ks, IRAs, endowments, or philanthropies – managing around your capital gains can lead to enormous improvements in net after-tax returns. Approaches like direct indexing, asset location, and appreciated stock sale planning can yield substantial savings. And, they are risk-free.

7. Fees matter a lot: There can be no doubt that high fees are a drag on long-term performance. We do everything possible to lower costs to clients. The obvious and easy thing to do is we use managers like Vanguard, DFA, and Blackrock which are the cheapest in their class for mutual funds and ETFs. But we also do several things with our own RIA fees: Our Milestone Rewards cuts fees by 15% for clients who create and regularly review their financial plan and exhibit good financial behavior. And, we offer a robo-advisor that comes with a dedicated human advisor at less than half of our regular fees.

8. Tactical portfolios: Goaltender is our tactical portfolio, and it is the only such vehicle I am aware of that refuses to promise outperformance (the goal is market performance). But it serves a vital part of an investor’s plan: It keeps their “real money” fully invested while allowing the investor to feel like they did something as opposed to nothing. This acts as an enormous emotional relief valve.

9. Financial literacy fades so investors require constant refreshers. Studies have shown that the half-life on financial literacy is quite low. Thus, if you want your clients to understand why you are not picking stocks or market timing, and why you are willing to ride out volatility and drawdowns, you must constantly reinforce the data on this. RWM uses blog posts, podcasts, videos, clients letter, and quarterly conference calls all to reinforce these key notions above.

10. Investing is simple, but hard: Nothing on the list is overly complex or impossible to achieve. None of these things require extraordinary skills or ability. But they are difficult to perform consistently, over long stretches of time, without occasionally messing up. The best investment strategy for you is the one you’re likely to stick with. Achieving this requires dedication and committment, something most of occasionally find oursleves lacking.

My goal is for our clients to own a broadly diversified, low-cost portfolio of global assets, rebalance and tax loss harvest annually,  stay informed as to what is going on in markets and the economy, but — more or less — leave their portfolios alone until their financial goals (retirement, generational wealth transfer, philanthropy) are realized.

Those are the main points I hope to make today — and given our limited time, I doubt I will get through half of them. They are presented here for your enjoyment and debate.



Alpha & Beta: Two Competing Investment Philosophies (August 22, 2015)

Accessing Losses via Direct Indexing (April 14, 2021)

Tax Alpha (April 14, 2022)


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