The Wisdom of Warren Buffett

At Greenspring, our investment philosophy is pretty simple.  We try to help our clients manage their investing behavior by focusing on the four simple things they can control:

  1. Being globally diversified
  2. Being disciplined 
  3. Controlling costs
  4. Minimizing taxes

Arguably the wisest and most successful investor in history, Warren Buffett is certainly the richest (at the end of 2013 he was worth an estimated $60 billion and made roughly $37 million per day last year!).  One of my favorite reads each year is the annual letter he writes for shareholders of Berkshire Hathaway (see the link for access to his letters dating back to 1965).  You will learn more about business and investing than you can imagine simply by reading this treasure chest of information.

Fortune Magazine has just released an exclusive excerpt from this year’s upcoming letter.  I was struck by 3 things that he emphasized that resonate closely with our approach:

  • The importance of managing behavior – His 5 “fundamentals of investing” all focus on avoiding negative behaviors (” If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”)
  • Validation of passive investing for most people – “The goal of the nonprofessional should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
  • The wisdom of low cost diversification – “Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

If you have an interest in becoming a smarter investor I would encourage you to give Mr. Buffett’s annual letter a read when it is released on Saturday.  If the excerpt is any indication, it’s sure to be a great read.

The (k)larity Quotient℠

I’m excited to announce that Greenspring has officially launched the (k)larity Quotient℠, a revolutionary new tool to help companies and retirement plan committees manage their corporate retirement plan.  We are describing it as the retirement industry’s first “fiduciary performance framework.”

The (k)larity Quotient℠ represents nearly a decade of innovation and research and has been in development for nearly an entire year to create the methodology and build the database.

The (k)larity Quotient℠ offers companies a simple, yet profound method for quantifying the critical aspects of a high performing retirement plan.  Using 40 key performance indicators in the 4 key dimensions that drive plan success, they can see how their plan stacks up against other comparable plans.  Most importantly, they get a real sense for what’s working, what isn’t and what steps they need to take to improve overall plan management and performance.  The goal is to provide a simple and transparent decision-making framework that helps companies improve the quality and effectiveness of plan-related decisions, benefiting both employees and the company itself.

We think the (k)larity Quotient℠ has a chance to revolutionize the retirement industry and transform the way companies design, measure and manage corporate retirement plans by giving plan fiduciaries an easy way to identify and fix issues before they became problems. Plus, it’s a very simple and straightforward process for a company to learn if its plan has a high (k)Q℠.  We’ve found it takes roughly 30 minutes for plan sponsors to fill out our questionnaire and gather 4-5 necessary documents.

You can read the press release and also watch a short, 75-second animated video we created to help explain the (k)larity Quotient℠.

Check it out at www.greenspringwealth.com/KQ!

Why Are Investors Still Flocking To Hedge Funds?

This morning I read the Bloomberg article, “Hedge Fund Net Inflows May Triple This Year, Deutsche Bank Says” and hope that their predictions with fund flows are as good as their prediction of which stocks are the best to own.  For the life of me I can’t see why investors would want to choose an asset class that is notorious for extremely high fees and underperformance.  Not quite the winning combination.  In the past I have mentioned it might be the cache that comes with investing in hedge funds.  It could also be the idea that if other wealthy people are doing it, it must be ok.  Here is an excerpt:

The increase in allocations predicted would be the largest into hedge funds since 2007, based on data from Chicago-based HFR. The optimism follows the best industry return in three years and the growing trend of investors folding hedge funds into their stock or fixed-income allocations, the survey said.

“With the majority of investors happy with hedge-fund performance, we expect institutional investors to further strengthen their commitment to hedge funds,” Anita Nemes, global head of the Deutsche Bank’s hedge-fund capital group, said in an e-mailed statement.

Fear and greed make people do funny things.  My guess is that fear is still the driving force for many investors as 2008 is still fresh in many investor’s mind, and after the huge run in the stock market, as a group we are just waiting for the next crash.  In addition, every commentator and their cousin is warning about rising interest rates (and therefore falling bond prices).  That is why hedge funds sound so appealing.  But when you look at the results, they just don’t hold water.  

Index                                                                   1 yr               5 yr             2008
HFRX Global Hedge Fund Index              6.72%          3.45%          -23.25%
S&P 500 Index                                                32.39%        17.94%       -37.00%
Barclays Aggregate Bond Index              -2.02%         4.44%           5.24%

We continue to write about hedge funds because of our concern over the poor returns and high fees (high correlation between these two).  This is not a winning combination and one investors should be weary of.

A 1,000 Year View Of The World’s Economy

For most of us, it just seems like a given that the US has been and will be the economic superpower of this world.  But it hasn’t always been that way.  Nomura put out some fascinating research about the changing tides of the world’s economy since the year 1000. 

economy share

 

There are a few things I find very interesting in this chart:

  1. The explosive growth the US experienced from the early 1800s until around 1950 is spectacular.  During this period there really isn’t any other country/region that ever had this kind of explosion.
  2. China and India were once economic powerhouses, then became obsolete and are now rising to the top again.  While trends move slow, no one seems to stay on top or bottom forever.
  3. The most recent trend seems to be the shrinking share of the world’s economy by the developed economies of the west, while simultaneously seeing the growth of the east explode.

Are there are any investment implications we can find in this chart?  I am not sure there is anything conclusive, but as an investor this helps us to realize that global diversification is important.  It is hard to maintain a spot at the top forever and we don’t know when our tide will change, so it is important to maintain country diversification to minimize your risk.

You Are Not A Contrarian

It seems like every investor (amateur or professional) bills themselves as a contrarian.  They will tell you that they tend to buy companies that are unloved or unwanted when they are trading for a great bargain.  The simple fact is that this is very hard.  The Motley Fool has a great article on this very topic.  Here is a key excerpt:  

One of the biggest ironies in investing is that while almost everyone thinks they are a contrarian, almost no one actually is. I remember 2007, right before the market peaked. Just about everybody I knew thought they were a value investor, zigging where others zagged. But at investing conferences, you found out that all these guys were basically buying the same stocks. What people thought was a contrarian view was actually rampant groupthink. It felt great when you, the “contrarian,” had your views confirmed by another “contrarian.” But contrarianism isn’t supposed to feel good, and you’re not supposed to have it confirmed by others. That’s why so few can actually do it. It’s rare — not impossible, but rare — that someone can remain blissfully content when everyone else around them thinks they’re crazy. One of the nastiest tricks our minds play is convincing nearly all of us that we can be that person.

I highlighted the most important part.  Being a contrarian goes against almost every fiber of of who we are.  The data from the research shows that most investors are the opposite of contrarians…they follow the herd.  In my opinion there are a few ways you can fight this urge:

  1. Rebalance without thinking too much- if you have targets for your portfolio you should periodically be rebalancing to bring things back in alignment.  Don’t overthink this…just do it.  It will be hard.  Right now you would be selling US stocks and buying bonds and emerging market stocks.  They are completely unloved, but I thought you wanted to be a contrarian?  
  2. Automate things- if there is a way to automate this process, even better.  Then your mind can’t get in the way.  Things like bi-weekly contributions to a 401k into a group of funds (some of which will most likely be things you don’t like to invest in) or auto rebalancing a portfolio is a great way to do this.
  3. Be diversified- one thing that can go wrong if you are a contrarian is a bankruptcy if you are buying an individual security (higher risk when you are buying companies that are in distress).  Keep your investments broadly diversified and avoid buying individual stocks.  It makes it a whole lot easier to be a contrarian when you know the permanent loss of your money is off the table.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.