Money Talks: Principled Investing

When it comes to savvy investing, many people think about Michael Burry profiting 489% returns off of the 2008 market crash. After all, only a handful of people in the world took the bet against mortgage-backed securities at its peak and walked away with a hefty return.

But anyone who read Michael Lewis’s book, The Big Short: Inside the Doomsday Machine, also saw Burry’s investors infuriated for many months leading up to the crash. Each month they were paying hefty premiums to sustain the ongoing bet which, at the time, seemed like an irrational idea. Indeed, it was so outlandish that several of the world’s largest investment firms (including the likes of Wells Fargo, Morgan Stanley & Goldman Sachs) took the opposite bet, and lost. Household names like Bear Sterns and Lehman Brothers went out of business. One report estimates that the 2008 financial crisis cost Americans nearly $12.8 trillion.

So how does one “win” consistently when even the largest institutions make massive errors? The truth is they don’t. As a matter of fact, SPIVA’s U.S. Year-End 2017 report revealed that the vast majority of active investment managers underperform the market over a 10-year period. While there are a lot of variables that make that statistic convoluted, the fact remains that many financial advisors are simply selling what people want to hear.

Here’s the point: the world’s most consistent investors have principles they stick to.

Warren Buffett made billions focused on finding disproportionate value using twelve tenets to guide him for long term bets in the market. Others, like Michael Burry, analyze droves of data to find opportunities to make big bets. Sometimes they’re wrong, but they’re betting on a philosophy of success rather than the next big thing. And while they adapt to the times, the fundamental principles don’t change.

I had a conversation with a family office that had been burned by several advisors. They were regularly sold “access” to unique alternative investments that only the representing firm could provide. It sounded savvy, sophisticated, and designed for families with means. But the reality was often significant illiquidity, lackluster returns, complex reporting, and vague understanding of how the investment actually worked. The advisors themselves are typically only brokering the exchange, and therefore not the individuals responsible for the investment. There were no principles in the investment strategy; it was simply the best “idea.” At the end of the day, it was a fancy sounding product that provided a large commission check to the broker and ongoing pain to the family.

Investing in the market is never a sure thing. But principles help guide the best investors to better returns and lower risk. As an example, our principles are reflected in our Three Dials. We look at Valuation, Economic Fundamentals, and Market Momentum collectively to gauge the pulse of the market and adjust risk accordingly. As a result, we aren’t betting on timing the market. Our attention is focused on the raw data, analyzing it through our Three Dials, to adjust risk only when necessary as the markets move. Like Michael Burry, sometimes we’re a little early. Other times we’re a little late. But overall our principles guide us in delivering our objective of mitigating short-term risk, while producing competitive yields over the long haul.

Are your investments principled?