I consumed two fat books on the life and investment strategies of Warren Buffet this past year, both of which improved my already considerable knowledge of his approach. Buffet sniffs at index investing, and especially at trend followers. His does the challenging work of company-by-company financial analysis. Consider that while the S&P was losing 20% over the past 10 years, Warren Buffet’s Berkshire Hathaway rose from about $52,000 a share to about $100,000, nearly a 100% increase. This was not the result of speculation, but reflected a steady increase in Berkshire’s book value. In fairness, the ride for Berkshire holders has not been without its ups and downs. At its peak, the stock was quoted at over $140,000 a share.
Since we put a high premium on low volatility for our clients’ Balanced portfolios, even Berkshire -like performance would be unacceptable if accompanied with Berkshire’s level of volatility. My experience with investors over a 35 year career is that during rare but inevitable periods of sharp market declines they often panic, leaving the party just when they should be putting on their party hats. The solution is to strive to keep volatility, which most people experience as “risk”, to a minimum. I think we must be doing something right: in the face of a prolonged and massive bear market, we lost just four clients between mid 2008 and mid 2009. For the majority of our people, their fortitude has been rewarded. I believe this is a direct result of keeping short term losses in the “comfortable” range for most investors. Also, over our eight years in business we have regularly bested stock market indexes. Even in 2008, while major stock indexes tumbled by 39%, our clients on average sacrificed about 14.5% of value. As the market melted further in the first ten weeks of 2009, our client portfolios held up well. Given the cautious approach we take, when stocks mounted an almost unprecedented recovery, our client portfolios did not track as strongly upward, nor did they need to: when you have not fallen into a deep well, the climb out is pretty easy. Today, most clients have recovered to within 4% of late 2007 portfolio levels. By contrast, and despite a terrific run in 2009, the U.S. Standard & Poors index remains off by about 25%.
How have we kept volatility low in the face of two bear markets over the past eight years? Considerable use is made of undervalued equities. If one does not over pay (i.e. technology companies in 2001), one does not get as bloodied when panic erupts. We also diversify across asset classes. Although this approach did not offer the usual traction during 2008, a year in which nearly every asset class did poorly, we were able to save the day by one other approach, one that is too often ignored by professional money managers: we are not afraid to “go to cash”. In fact, before the market meltdown began to gain momentum in September, 2008, our clients held more cash in their accounts than at any time in our history. A few complained about the low interest yields on money market funds, a couple took some money out and placed it in certificates of deposit. But thankfully, most clients left to us the timing of when to re-deploy that cash. This allowed me to scoop up good quality bonds and preferred stocks with yields of 7%-8%-9% even 11%. At the October 2008 market low, I gingerly positioned in a few great quality equities as well. When the Bear put down another leg, taking indexes below their October 2008 levels in March, 2009, I admit that I blinked. We sold off a couple of excellent companies, converting much of the proceeds to more high yielding investment grade bonds. The February -March sell-off proved to be a false signal, and since mid March stocks have roared back to life. I did not believe in the turn around until an important technical signal was signaled in July by then I’d foolishly sold off a few god stocks. Fortunately, we held enough, rebought or replaced those sold so that our client equity holdings have produced, at year end satsifying gains. However, I’ve never promised to make huge profits for our clients, and the past eight years have proven me correct.By dodging big losses, our gains coming as they do in the form of dividends and modest capital growth apparently have proven sufficient for most of our clients, as most of the people we had with us eight years ago, are still with us.I think this is because Our clients want something more valuable than the fast buck: peace of mind. When I sit down with a new, prospective client, I tell them that above all, we seek to reduce the wild ups and downs they have probably experienced at the hands of other advisers (or at their own hands). I also suggest that we can capture 80% of the US stock market upside. We have successfully delivered low volatility (less than half that of the S&P 500) and so far, have exceeded market returns over an eight year span. Thus our performance is something, attractive to those who understand the concept of risk adjusted returns.
