“Your Vision, Our Expertise: Your Peace of Mind” ®


Market Commentary 06/30/2014

On Success

The second quarter tends to be a busy time for us as we attend conferences and meet with fund management.  These conferences are where many of the top investment fund managers congregate, giving advisors the opportunity to speak with them about their best investment ideas, their thoughts on the economy, the impact of rising rates and geopolitical tensions, among other subjects.  Every year we strive to gather new information from these conferences to help our clients achieve their goals, yet we know that defining success can be difficult. 

Investment managers are often called successful if they outperform certain benchmarks, usually one index or another.  For individuals trying to meet their goals, though, relative performance to an index rarely has much value.  The goals of our clients are broad and varied and the only people that can define success are the clients themselves.  As financial advisors, we often talk about investments, but ultimately, they are just tools we use to help you reach your goals.  As we end another quarter, we will talk about investments and their indices but remind clients that the best benchmark to gauge success is whether you are able to meet your objectives.

This sentiment hit home when we had the unique opportunity to travel to Omaha and visit with one of the investment managers we have used off and on for more than a decade, an invitation which coincided with the Berkshire Hathaway shareholder meeting.  We enjoyed seeing Warren Buffet and his long time business partner Charlie Munger answer questions from analysts, financial media and most importantly, investors.  While there were lots of questions about individual holdings and future strategy, Mr. Buffett made sure to address the issue of performance.  Over the past decades he has talked about measuring the portfolio against a benchmark, with a goal of outperforming the S&P 500 over a 5 year period.  Indeed, the Berkshire conglomerate has only underperformed in one five year period since Buffett took control in 1965.  Yet over the past 30 years, the Berkshire stock portfolio has underperformed nearly a third of the time if looking only at single years.

Buffett is arguably the best investor on the planet and while even he hasn’t always met his short-term performance goals, his history of success is undeniable.  Buffett and Munger have spent a lot of time defining what success means for them and the managers of Berkshire Hathaway.  Charlie Munger has become quite well known in his own right for his musings on success.  He has frequently spoken on college campuses, and a number of his commencement speeches have been compiled in a book On Success.  It may be telling that there is little talk of finance or investing in these speeches.  His equation for success in life has much more to do with setting sights on where we want to be and resisting the many temptations that can derail us.

We all define success differently and strive for different personal and professional goals.  Beating a benchmark is certainly a professional goal for investment managers like Buffett and Munger.  As your investment advisor, we benchmark your investments against their appropriate indices and make changes as we see appropriate, keeping in mind the overall objectives of each individual.  That being said, professionals in our industry, as well as the media, have become fast to praise or criticize an investment for short term relative performance that may have little to do with meeting an investor’s overall goals.  At times our most important role as your financial planner is to make sure that your goals don’t get derailed by these distractions.  It is human nature to want to sell investments that haven’t done well in a recent period but experience has shown us that many of the best managers have periods of underperformance.  A critical part of our investment process is to select managers that have been successful over rolling five year periods of time and generate total returns net of expenses in the top quartile of their peers.  Our philosophy has always focused on the total return of a well-diversified portfolio, not whether the individual managers have beaten their benchmark index in the short-term.  We continue to look at the asset allocation relative to your lifestyle needs, keeping in mind the risks associated with your goals. Our experience has shown that the clients that weathered the markets of 2008-2009 in a diversified portfolio, with a mix of fixed income and equity investments, have done quite well.

We are constantly monitoring your investments, but our philosophy is not to make extensive changes in anticipation of market corrections.  When profits present themselves, as they have in the past 18 months, we reposition those profits into less volatile asset classes and keep the diversified asset allocation aligned with your objectives.  When underperformance occurs, we stop and examine the reason.  If there has been a fundamental change in the management team or the team’s philosophy, we will replace the investment with another one in our lineup.  However, these individual investments are just pieces of the overall portfolio customized to you and your goals.  The real question is whether your overall net returns are meeting your established objectives.  Success may simply be measured by whether or not your cash flow or accumulation needs are met. 

Looking to the second half of the year we feel the portfolios have been positioned well to meet the investment objectives of our clients but we expect volatility.  We are currently seeing active portfolio managers build up more cash in anticipation of a market decline.  This will allow them to buy more of what they currently hold at more attractive prices and acquire new investments for the portfolio that have become significantly discounted.  Even though broad market valuations are in line with historical averages, the economy remains vulnerable to shocks here and abroad.  We believe that clients with long term growth objectives should be aware of this.  Volatility should be expected and is not a reason to change course.  Portfolios designed around cash flow, having a greater emphasis on preservation, may also see volatility but our strategy is to ensure that cash flow needs will be met for years into the future without having to sell assets that have declined.

While we spend a lot of time on the research of individual investments, we never forget our priority is to help you meet your objectives.  Whether or not an investment beats a benchmark may factor into your success, it is rarely the sole factor.  We define success by your success! 

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA   
Asset Manager                                                            Asset Manager
Market Insight-Quarterly Perspectives, JP Morgan 3Q 2014; Munger, Charles T., On Success (Tucson, AZ: Davis Distributors, LLC, 2009).

IMPORTANT DISCLOSURES: The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy. Information obtained from sources is considered reliable but is not verified. The research and other information provided herein speak only as of it date. We have not undertaken, and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information. Performance information presented is not an indication of future results and index data is provided for market reference purposes only. This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed. This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy. This material is for educational purposes only. Mis-transmission is not intended to waive confidentiality or privilege.