4647 White Bear Parkway
White Bear Lake,
The following are 5 Timeless Principles which define our portfolio selection process.
Short term market movements can mostly be attributed to mass “herd” psychology (fear and greed), which are largely irrational and unpredictable, and typically bear no relationship to the underlying value of an asset.
Long term market movements are often the result of fundamental economic and financial environments and are more rational.
Even if purchased at the top of the market and sold at the bottom, an investment can still be profitable if held long term... but if purchased near the bottom and sold near the top, more money can be made in less time.
Accurately predicting the precise top (peak) or bottom (trough) of the market is not possible. However, investments can exhibit certain characteristics as they approach the peak or trough which can indicate potential buy and sell opportunities.
This is demonstrated by our next principle...
Price is what you Pay, Value is what you get." ~Warren Buffett
The underlying worth of an investment is known as its intrinsic value. Unfortunately, an investment’s current market price is rarely an accurate representation of its intrinsic value. Investments are frequently overvalued and undervalued.
Price behaves much like a roller coaster - Only intersecting its intrinsic value on its way up to the peak or down to the trough.
Most people follow the herd - Buying an investment after its price has inflated above its intrinsic value. They hold it through the peak and eventual downturn. The investor ultimately sells near the bottom of the trough when the price reaches its low point and they can no longer stomach the roller coaster. The investor has succumbed to emotions (fear and greed).
Identifying intrinsic value can clarify ones buy and sell discipline. It can also help keep emotions in check!
If two investments move in the same direction at the same time, they are positively correlated. If they move in opposite directions, they are negatively correlated.
Pairing investments with lower correlation can make a portfolio less volatile.
Non-traded or illiquid investments have the ability to reduce correlation and possibly increase return primarily because they aren’t traded on public investment markets. As such, they are immune from the “herd mentality” that typically causes people to buy and sell at inopportune times.
Examples of investments with reduced correlation to the stock market can include: natural resources, hard assets, real estate, hedge funds and managed futures.
It is important to note - too little liquidity can create additional risk in the event assets may require to be sold at discounted prices.
• Leverage used wisely can multiply returns in an upward trending market.• Leverage used unwisely can multiply losses in a downward trending market.
If leverage is used to buy an overpriced investment, it can just be a matter of time before the entire investment could be lost . . . or potentially more.
It has been said that imprudent use of leverage can lead to loosing more than everything.
Leverage is a double-edged sword whose use demands respect!
Never base investment selection on what you think is going to happen in the future:
History is replete with examples of failed attempts to predict the future, especially in the areas of economics, investments, finances and interest rates. According to “The Fortune Sellers” by William Sherden (Wiley, 1999), the only forecasting profession with even partial, though imperfect accuracy is meteorology.
Investors who make decisions based on what they or “experts” think is going to happen in the future, aside from price/value considerations, have often regretted such decisions.