Keep a Calm Head in Battle

Dan WilliamsDan Williams, CFP, Investment Analyst

The Battle of Thermopylae, dramatized in the 2007 movie 300, is the story of how a relatively small group of 7,000 disciplined Greeks in 480 B.C. held off a group of 100,000-150,000 invading Persians for three days. Due to the size disadvantage of the Greeks, their eventual defeat at this battle was inevitable. However, this group kept a calm head in battle while the Persian leader Xerxes was said to become so enraged by the delay these Greeks had caused his army that at the battle’s conclusion, he decapitated and crucified King Leonidas of Sparta, the fallen hero of the Greeks, elevating his status as a martyr. While the Greeks lost this battle, at the Battle of Plataea in 479 B.C. the Greek forces won the war. The manifestation of this Greek discipline was the Phalanx formation which lined up troops in close order to form a shield wall defense that marched forward using spears to take down any army in front of them. Given that the Phalanx was only as good as the weakest point, discipline was crucial to its success. This concept was later further refined and improved upon by the Roman legions that used it to great effect to build their empire.

shutterstock_141582367_collegeMay and June mark the end of another school year and the arrival of almost 20 college interns to Brinker Capital. These college students, the most successful not being strangers to discipline, have been exposed to the science of investing in their college courses but have come to Brinker in many cases to help fill the gaps regarding the art of how to identify good investment strategies. To help lay the groundwork for this understanding, we encouraged them to read Money Masters of Our Time by John Train, a book profiling 17 different investment managers of the 20th century.

While all investment managers have proven successful, there was no one right process identified. T. Rowe Price had a process of identifying leaders in very fertile growth areas and holding them long-term until they become mature businesses in a mature industry. Benjamin Graham on the other hand focused on systematically buying the stocks that were thrown away at less than two-thirds of their net current assets and selling once they returned close to intrinsic value. Warren Buffet took a Benjamin Graham initial approach to valuation but then overlaid it with attention given the quality of the businesses and patience to hold these higher quality companies long-term like T. Rowe Price. John Templeton brought a similar attention to valuation and patience but was more willing to go global to find his bargains. George Soros went global as well but speculated more than invested with much more frequent trading in an effort to time the market. This is just to name some of the “money masters” this book discusses.

shutterstock_38215948-soldiersIt is clear that, although all of these managers have been very successful on their own, if hypothetically a super investment management team was able to be formed with these members, the fund would likely suffer from way too many and way too different processes. Like an army with too many generals, having more leaders is not always better. The only element that they seemed to have in common is the fact that they had processes in place that were fundamentally sound and that they stuck to in times of short-term market stress. Some ignored the market swings, some used it as buying opportunities, but all found success by putting their emotions in check when many market participants were caught up in fear or greed. In other words, they had discipline. Like a Roman Phalanx facing down an enemy, a steadfast commitment to a sound plan in the heat of the battle wins the day more often than not.

As such when we evaluate managers this is exactly what we look for. That is to say we need managers to have an effective, sustainable, and proven investment plan and ability to stick to the plan. Much has been made of how individual investors chase performance in good times and break rank at exactly the wrong time in times of stress. While very few of us will prove to be as successful as Warren Buffet, if we can all strive to at least have a plan and stand our ground to keep emotions out of investment decisions we all can be better off.

How to Become an Informed Consumer of Financial News

Dr. Daniel CrosbyDr. Daniel Crosby, President, IncBlot Behavioral Finance

Whenever given a microphone and a stage, I take the opportunity to warn investors and financial professionals alike against the harm of keeping too close a tab on the financial news. Since my exhortations to turn off the TV are so roundly ignored, I’ve decided to take a new tack—exchanging media abstinence with “safe watching” as it were. With investors, as with unprepared teenagers, the only sure-fire way to avoid trouble is to leave it alone altogether. However, being the realist that I am, I hope to provide some tips for safe viewing that will allow you to indulge without contracting “media transmitted irrationality.”

Of course, the irony of warning you about the ills of financial media via, well, financial media, is not lost on me. However, the very fact that you are here means that you may have a problem. Gotcha! It is a strange thing that an awareness of current financial events can lead to worse investment outcomes. After all, in most endeavors, greater awareness leads to improved knowledge and results. So what accounts for the consistent finding that those who are most tuned in to the every zig and zag of the market do worse than those who are less plugged in?

Informed ViewingThe first variable at play is timing. I won’t bore you with an extended diatribe on short-term market timing, but the fact remains that average equity holding periods have gone from six years to six months in the last five decades. This national case of ADHD has been precipitated in part by advances in trading technology, but is further exacerbated by the flood of information available to us each day. Unable to separate signal from noise, we trade on a belief that we are better informed than we are.

Another damning strike against financial media is that the appetite for new content flies in the face of investing best practices. Warren Buffett famously advised investors to imagine they have a punch card with 20 punches over the course of an investing lifetime. By espousing this strategy, Buffett encourages a policy of fewer and higher-quality stock selections, encouraging downright inactivity in some cases. Compare this time-tested approach with the demands placed on the financial press. Each night, Jim Cramer picks 10 stocks to pass along to his viewers to help sate the national appetite for cheap investment advice and the erroneous belief that more is better. Cramer has used up his whole punch card before Wednesday, and it’s not because it’s a sound investment strategy, it’s because it sells commercials.

Consumers of financial media who fail to account for these sorts of perverse incentives can feel disillusioned when the advice of such vaunted “talking heads” leads them so far afield. Conversely, a more informed consumption of media can enable each of us to separate wheat from chaff and learn to recognize a bona fide expert from a circus clown in a $2,000 suit. The following tips are a great place to start:

Evaluate the source. Does this individual have the appropriate credentials to speak to this matter or were they chosen for superfluous reasons such as appearance, charisma or bombast?
Question the melodrama. While volatility can be the enemy of good investing, chaos and uncertainty are a boon to media outlets hungry for clicks and views.
Examine the tone. Does the report use loaded language or make ad hominem attacks? These are more indicative of an agenda than an actual story.
Consider motive. News outlets are not charitable organizations and are just as profit-driven as any other business. How might the tenor of this report benefit their needs over yours as a decision maker?
Check the facts. Are the things being presented consistent with best academic practices and the opinions of other experts in the field? Are facts or opinions being expressed and in what research are they grounded?

Financial media is always going to have an angle, but so do you and so does every person with whom you’ll interact. That being so, the best strategy is to become skeptical without being jaded and cautious without being paralyzed by fear. If you found yourself thinking, “Who the hell is this guy to lecture me on media consumption?” you’re off to a good start.

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Safeguarding the Family Enterprise: Children and Wealth

Tom WilsonTom Wilson, Managing Director, Private Client Group &
Senior Investment Manager

A blog in a continuing series on the safeguarding of the family enterprise.

There is a Chinese proverb that goes, “Wealth does not pass three generations.”  This fits the notion that when significant wealth is created by the first generation of a family, the second generation gets to enjoy it, but the third generation, which was so far removed from the work ethic of the first generation, squanders it.

The conversation of wealth is often missed between parents and children.  For wealthy parents, discussing money with children can be a daunting task.  When is the best age to discuss the subject?  How much is too much information?  What if I want to give my money away to charity?  The stress surrounding these questions can often prevent these conversations from taking place.

Safguarding the Family EnterpriseWhile these questions, and others, are difficult to bring up, they are essential.  They will provide the context to determine the balance between providing enough money so that the children can pursue their dreams without a concern for their finances, and not providing so much of an inheritance that a feeling of entitlement or loss of self-purpose develops.  Warren Buffet said it best when he noted that he wanted to leave enough money for his heirs so they can do anything, but not so much money that they can do nothing.

A Wall Street Journal article on the subject gave several suggestions on how to speak with kids about generational wealth.  A favorite was the example of a pre-teen son who approached his mother and asked, “Are we rich?”  The mother replied, “Your father and I are. But you are not.”

A holistic approach to wealth management can go beyond asset allocation and financial planning.  Make sure you participate in the educating of children around family wealth.

Investment Insights Podcast – February 24, 2014

Investment Insights PodcastBill Miller, Chief Investment Officer

On this week’s podcast (recorded February 20, 2014), we deviate from the traditional what we like, we don’t like, and what we’re doing about it format.

We currently find ourselves in an environment with remarkably stable prices as measured by inflation. A period that matches some of the same sentiments echoed by Warren Buffet in his 1980 Berkshire Hathaway annual report.

Often we hear bad things about emerging markets, Congress, Fed policy, etc., but we may be missing the forest for the trees. The 1970s, a period when prices were rising quickly and investors struggled to keep pace, offers an interesting perspective on today’s environment.

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.