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Kendall J. Anderson
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Kendall J. Anderson, CFA is the founder and President of Anderson Griggs Investments. Anderson Griggs manages equity only and balanced separate accounts from Rock Hill, South Carolina. Kendall was recognized by Money Manager Review as the number 1 large cap growth manager for 2004. His... More
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  • 29,334 Mutual Funds

    Although the rest of America may need a manufacturing revival, mutual fund manufacturing is not in need of help, as the business has been growing continuously for three decades. Because of the sheer number of funds and the amount of investment dollars they control, there is a very high probability that we are buying new positions and selling existing positions to one or more mutual fund companies.

    Because mutual funds and their business partners, the investment companies that manage the bulk of the nation's defined benefit retirement plans, control as much as 80% of the supply of stocks and bonds available to the investing public, it is important for us to explore the business in a bit more detail. Just like a coach studies competitors to understand their strengths and weaknesses, we should study our own competition, the professional world of money management.

    Details on mutual funds are available through multiple sources. We use the data provided by Morningstar Advisor Workstation, which includes statistics on 29,344 mutual funds. Because Morningstar provides so many details, along with an ability to easily slice and dice data, any number of academics, mathematicians or analysts after a few minutes of work may believe they have reached the state of statistical nirvana. We are not so inclined to data-mine, as our major need is to gain a little knowledge on the costs of managing the portfolios and the flow of funds into and between stocks, bonds and everything else.

    I know you just can't wait for us to delve into the details, but I wanted to first share with you a little history of the mutual fund business which has taken us from one fund to the 29,344 you can choose from today. The first mutual fund, Massachusetts Investors Trust, was established in 1924. In the same year, Paul Cabot, another Bostonian, created State Street Investment Company. It was Mr. Cabot whose operation of State Street established the profession of modern investment management as we know it today.

    Prior to Cabot, the only "investment" suitable to be held in trust were bonds paying a fixed amount of interest. Once the bond was purchased it was held until maturity. There was no thought of managing a portfolio, and by that accord there was no need for a third party investment manager. Cabot changed this when he established State Street, which from its beginning invested in common stocks. This is how he described it: "When I started out in this business nobody believed in common stock, you know. People thought they were risky and exotic, unsuitable for a conservative investor. Bonds were the thing."

    It takes a special person to change the world, and Paul Cabot was one such special person. He had to market himself as an individual people could trust completely. He was a Harvard graduate, married with five children, and lived a very conservative and outwardly trustworthy life. It has been said that in his later years, whereas the typical investment management office was elaborate, Cabot's office was sparse, decorated with a bookcase, a few wooden chairs, an old desk, and a coat rack.

    He managed his fund's money with the same approach. He only invested in companies he felt had trustworthy management. The quality of the firm came first. He said, "The most important quality is management that's able and honest." Combining this quality with common sense, the best research available at the time, and risk-avoidance, he gradually convinced others that investment management was a worthy profession and that managers should be able to charge for the services they rendered to the public.

    Paul Cabot may have created the third party investment management business, but it is the courts and Congress that we can thank, or blame if you so choose, for the escalation in the manufacturing and distribution system of mutual funds. In 1958, the Ninth Circuit Court of Appeals ruled against the Securities and Exchange Commission (SEC) who had sued to block the sale of shares in Insurance Securities Incorporated (ISI). ISI was the investment adviser and principal underwriter of an investment company. It had sold its shares for 15 times book value in 1956. Our Federal watchdog, the SEC, felt strongly that the sale constituted "gross abuse of trust." The sale at 15 times book value violated the SEC Act of 1940, as this excess price represented a payment for succession to the adviser's fiduciary office.

    You may or may not know that a Registered Investment Adviser who offers investment advice for a fee imposes a duty to act as a fiduciary in dealings with his or her clients. They must at all times place their client's interest above their own in all matters. The SEC felt that the sale at 15 times book value rewarded the adviser at the expense of the adviser's clients.

    The court agreed with this assessment, but believed that the value of the contracts ISI held between itself and its clients were the property of the management company. This ruling changed the incentives for investment management companies from one driven by earning a respectable return for its clients, to one in which managers could reap excess profits through entrepreneurial activities up and beyond those earned through fund management.

    Three other occurrences in the 70's had a material impact on the mutual fund industry. They were the elimination of fixed commission rates, the establishment of Individual Retirement Accounts (IRAs), and the Employee Retirement Income Security Act (ERISA).

    It is easy to understand how the elimination of commission rates changed the industry. When all investors paid the same commission no matter which broker they used, brokers competed with superior research or service. The level of commissions charged was high enough that the profits were sufficient to support these activities. When they were no longer sufficient, the research efforts were directed towards larger investors, mutual funds and other institutions.

    Individual Retirement Accounts (IRAs) were the perfect law for the mutual fund industry. Contrary to some politicians, most individuals do not desire to pay taxes. If a tax incentive is given to them and they are able to participate, they will. Given that the amount of tax deductible contributions were limited to a relatively small amount, and the mutual fund industry was able to fully invest these small amounts of money into the markets with little cost, millions of individuals became new fund investors.

    ERISA is a federal law that sets minimum standards for pension plans in private industry. The rules cover both Defined Benefit Plans and Defined Contribution Plans. You know these by their common names, a pension plan and a 401K (ERISA does set standards for other plans that include welfare benefit plans). ERISA virtually guaranteed the future of professional investment management by giving the right to plan participants to sue for benefits and breaches of fiduciary duty. The law also required a level of minimum funding of plan assets to meet future pension payments for defined benefit plans. This requirement created a very real incentive for employers to close or freeze their pension plans in favor of 401Ks. As you know, a 401K is funded by the employee, and the employee takes full responsibility for investment results. With this switch to 401Ks and the need for an investment product that could handle small contributions, the mutual fund industry again found themselves with millions of new fund investors.

    At first these changes had minimal impact, but all that changed with the equity bull market of the 80's and 90's, and with the thirty year bull market in bonds just now coming to an end. Huge profits were created for the investment companies, and with huge profits available for the taking, funds were created nonstop. At the beginning of the 1950's, there were approximately 75 common stock mutual funds available for investing. During the last couple years of the 50's and into the 60's, 240 new equity funds were introduced. In the 70's and 80's, an additional 650 were created. The 1990's brought more than 1600, and during the last decade and the first four years of the current decade, thousands more made their way into the complex.

    At the same time, the number of financial advisers has grown exponentially. Today you can find a fund adviser at your bank, your insurance company, your credit union, your financial planner, and your broker. If you check the Financial Industry Regulatory Authority (FINRA) Broker Check site, you will find information for 4303 individual licensed or registered investment salespeople who are within a 25 mile radius of our office. It is the work these individuals, and the direct marketing of fund companies, that generate the flow of money into and out of mutual funds. Let's look at these flows in 2013:

    Fund TypeFund Flows
      
    All Stock Funds$320.0 Billion
    Open End Mutual Funds$183.7 Billion
    Exchange Traded Funds$136.3 Billion
    U.S. Stock Funds$163.9 Billion
    Non-U.S. Stock Funds$156.1 Billion
    All Taxable Bond Funds$ 29.0 Billion
    High Yield Bond Funds-$5.3 Billion
    Floating-rate bank loan funds$ 62.6 Billion
    Commodity and Precious Metals Funds-$28.4 Billion

    Source: Lipper

    Understanding fund flows is important to us. Given that market prices, especially for very large and powerful companies that make up our own universe for investing, are pretty close to the underlying value of their businesses, opportunities to buy low are hard to find. If people are indifferent to pricing, which I feel most mutual fund investors are (since it is nearly impossible to calculate an intrinsic value of a mutual fund portfolio), a positive flow of funds represents an increase in demand on a limited supply and thus a higher price. The opposite is also true, in that a negative flow of funds may just create an opportunity to buy low. This could explain why we are having a difficult time finding undervalued businesses to purchase today. I'm not too worried about that, as opportunities will always come about for those of us who have a little patience and recognize that the price paid is the single most important driver of investment returns.

    The 4,303 licensed or registered salespeople and their firms need to be paid. The payments can come in the form of commissions for the sale of a fund. They can come from the fee paid to a broker or investment adviser for the selection and monitoring of a portfolio of mutual funds, or through some other method of payment for services. We are not too concerned about the charges, but as we look at the underlying cost that each fund owner pays to the fund company for the management of the fund's assets, it is important to remember that the advisory costs are in addition to the management fees. In many instances, these fund costs are not easily available for an investor to see, but they do affect your returns.

    Let's take a look at the expenses passed through to the fund shareholders for investment management and at the brokerage cost that a fund company pays for the buying and selling of the holdings in the fund. This is not available directly, so we just have to guess at the cost. Being that Jack Bogle, the founder of The Vanguard Group, has been studying the cost of mutual fund management for more than fifty years, we will use his suggestions to calculate these costs as 1% for 100% annual turnover of fund assets. Obviously, each individual fund has a unique cost for their fund management. What follows is the simple average.

    Morningstar CategoryTurnoverCost of Turnover as % of NAVGross Expense RatioTotal Expense
         
    All Mutual Funds89.90%0.899%2.176%3.075%
         
    Large Blend62.58%0.6258%1.835%2.4608%
    Small Blend65.05%0.6505%1.980%2.6305%
    World Stock63.34%0.6334%2.176%2.8094%
         
    Real Estate65.01%0.6501%1.595%2.2451%
         
    Long Term Bond124.21%1.2421%1.162%2.4041%
    Short Term Bond145.72%1.4572%1.074%2.5312%
    High Yield Bond80.74%0.80741.386%2.1934%

    Source: Morningstar Advisor Workstation 2.0 as of January 10, 2014

    As you know, one of our primary objectives for all of our clients is helping you maintain the purchasing power of your savings. In order to accomplish this, we need to make some projections of the minimum return you will need to accomplish this goal. A simple way to calculate the minimum required rate of return is to add up the following. Go ahead and fill in the blanks... it will be enlightening and beneficial.

    Future Rate of Inflation (We are suggesting 2%) __________

    Taxes paid on returns (0% to 4% of the total portfolio

    depending on your tax bracket) __________

    Cost of Investment Management (Commissions & Fees) __________

    Total (Minimum Rate of Return Required) __________

    Of the three items we suggest in calculating your own minimum required rate of return, cost is the simplest to obtain and monitor. The others are variable and are subject to a lot of guess work when looking beyond the current year. With a return goal in place, it is much easier to manage your portfolio. Next month we will share with you our expected rates of return for common stocks, and what we would expect to earn from bonds and other interest paying alternatives over the next year and beyond.

    Until next time,

    Kendall J. Anderson, CFA

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirement for advisors. This commentary is for informational purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part 2 to a client in an authorized jurisdiction and receive a properly executed Investment Supervisory Services Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs’ Investment Objectives, individual account, individual security or index. Upon request, Anderson Griggs Investments will provide to you a list of all trade recommendations made by us for the immediately preceding 12 months. The authors of publications are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Investments’ office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.

    Feb 11 11:12 AM | Link | Comment!
  • Investment Advice – Technology – And How To Lose Money In The Coming Years

    Kendall J. Anderson, CFA

    July 22, 2013

    Adventures are good for the soul

    I apologize for being a bit late this month with our letter. I have been a little selfish, taking a two week adventure away from everyone. My quest was to seek out oddities dedicated to planes, trains and automobiles throughout North America. I've seen statues dedicated to the Underground Railroad on the side of a river in Michigan, a plaque dedicated to the builders of the Trans-Canada highway somewhere in Ontario. I took a ride in the aero-car in Niagara Falls and welcomed the cog train into the station at the top of Pikes Peak. I stopped by the little sign that is dedicated to the car that broke the sound barrier in the desert of Nevada and took the tour of the Titan Missile museum in Green Valley Arizona. I rode the free ferry in Galveston, traveled across the world's longest continuous bridge over water at Lake Pontchartrain and then turned around and went over it again, the other way. Took a look at a racetrack and could not help myself but to take a trip on both sides of the first superhighway in America, the Pennsylvania turnpike. Plus another fifty or so other special sites dedicated to someone or something.

    Adventures are good for my soul. They create wonderful memories, both of where I have been and all the effort it took to get there. All of us have memories, both good and not so good. I am a bit worried about the near term future. This worry comes from my own memories created years ago during a time when changes were taking place in our economy that rewrote the rules of investing. It has been said that history doesn't repeat itself - exactly, but it surely can rhyme. The next few years we will find out if another bout of change takes place that rewrites the rules of investing. I will explore these thoughts over the next few pages and share with you what we are doing to address these concerns. But first we need to take a look at the current wealth management industry and the rules of investing as applied by the majority.

    I have heard, whether it is true or not, that 85% of all wealth managers use investment products, i.e., mutual funds, separate account managers, alternative investment managers and others, instead of building and maintaining a portfolio directly. This is probably the appropriate way to go for most, in that the skill set for security analysis and portfolio management is quite different than the skill set needed for financial, tax and estate planning. It is possible for a firm to have both levels of expertise, but I am afraid that is the exception, not the rule.

    I have also heard that many in the wealth management industry consider investment managers nothing more than a commodity and are not worth much as investment returns are driven by asset allocation, not investment selection. Once again, this may or may not be true, although there are numerous studies that attempt to prove such a thing. Of course, many of these studies are written by individuals who make their living through asset allocation not security selection.

    Knowing these things still leaves me asking why so many financial professionals have chosen not to pursue financial analysis, investment selection or portfolio management as a career. Could it be that Warren Buffett gave us the answer in his 1996 chairman's letter?

    This is what he said: "To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well taught courses - How to Value a Business, and How to Think About Market Prices."

    Mr. Buffett recognized in 1996 that security selection did not have top billing in a finance curriculum. From my own knowledge, today's business schools seem only to discuss individual securities as trading vehicles used in and by speculators, not by serious investors. It is also obvious, at least to me, that business schools send a message to students that any serious investor will utilize the power of a computer to apply mathematical formulas based on the work of Harry Markowitz, Robert Merton, William Sharpe, Kenneth French, Eugene Fama, Fischer Black, Myron Scholes and a host of other less known, but highly influential academics to manage their investment portfolio.

    Since this quantitative approach to portfolio management dominates the world of investing today it is important to have a little background information. So let's explore the history book of quants.

    A Brief History of Quantitative Investing

    In the year 1900, Louis Bachelier wrote a paper titled "The Theory of Speculation" in which he completed a statistical study on the behavior of stock prices. Most believe this is the first scientific attempt to use math as a basis to understand and profit from prices changes in common stocks. Without fanfare, computers and the ease of distribution, the paper sat on a shelf and collected dust for decades.

    It wasn't until the 1950's that the world was introduced to the concept of "Modern Portfolio Theory" in a paper written by Harry Markowitz. Unlike Mr. Bachelier's paper, Harry's took off because it was written shortly after the first commercial computers were accessible to a broad group of academics and investment practitioners. They loved the idea of computing power and its ability to crunch numbers faster than any human possible. This theory and the computer led to William Sharpe's Capital Asset Pricing Model, and Fama and French's three-factor CAPM.

    These early practitioners developed ideas that could explain how market returns were generated historically. Of course it did not take long before enterprising investment managers took this historical explanation of market returns and used these findings in hopes that they would repeat themselves in the future thus earning excess returns for themselves and their clients.

    Over the past sixty years, the use of a historical relationship between asset classes, combined with the increasing power of the desktop computer, has taken the simplicity of the Markowitz model and morphed it into hundreds of quantitative approaches to investment management. The most basic approach is used by the vast majority of traditional security analysts including our firm; using the computer's ability to store and quickly recall fundamental data and screening out certain unwanted characteristics from the pool of over 25,000 individual securities available for purchase. In our case, we screen by a multiple of factors including market cap, liquidity, cash flow and debt. This reduces the number of securities to less than 250 before we begin the rigorous work of valuation. Once again, the computer and the data provided allow us to rank securities on a relative basis to the market averages, historical pricing of individual securities relative to themselves and other securities within their industry, and more importantly, determine a fair price for a business as a whole based on its future ability to generate cash to its owners.

    This approach may be used by the majority of security analysts, but each will use their own data differently from each other to find a few securities that they believe will provide superior returns. However, the majority of investment advisors today do not seek out individual securities, but groups of securities with similar characteristics. It may be groups with small, medium or large market capitalization. It could be based on the geographic location of the company's home, such as the U.S., Europe, Asia, China or South America. For fixed income investors it could be based on the average maturity or quality of the bonds within a portfolio of bonds. The ability to group securities and the investment industries willingness to create packaged products of specific groups of individual securities to meet the characteristics desired by wealth managers gives each organization the ability to implement an investment program to their liking. In all cases these quantitative managers are trying to use broad diversification and a historical relationship between each group in hopes that they will achieve superior risk-adjusted returns.

    I do not want to leave out the huge number of professional and individual investors that use technically driven models. These models are by most accounts the oldest form of any quantitative strategy. The basic premise of all technical models is that the only things you need to know about any security are its price and trading volume. These two characteristics can provide you with a time to buy and sell, providing a pattern to be exploited that can earn better than average returns.

    No matter what quantitative approach is used, they all fail in one respect, in that you must believe that history will repeat itself - or at least rhyme. This concept is what is causing my worries. What if history does not rhyme? What if it does but we cannot remember the rhyme? If our decisions are based on past history and history does not repeat itself then the solution to earning profitable returns based on the ideas of Markowitz's efficient frontier and it's siblings will not only lead to frustration, it will lead to monetary losses!

    Two Harvard professors, Ronald Heifetz and Martin Linsky, attempted to address this problem and provide an outline to solve the problem in their book Leadership on the Line: Staying Alive through the Dangers of Leading. They attempted to break down problems into two basic types - technical and adaptive problems. Each type of problem requires a different response. Confusing the two will result in failure.

    To solve a technical problem we use know-how and follow a set of procedures as provided to us by the professors.

    Technical Problems

    o Problems are amenable to solutions.

    o People already know what to do and how to do it.

    o Leaders know the answer and take corrective actions.

    o Problems are not trivial, but solutions are within a person's abilities.

    o Solutions are not necessarily easy, but expertise and knowledge are available.

    Adaptive Problems, however, involve challenges to deeply held values and well-entrenched attitudes. Solving an adaptive problem requires new learning.

    o Problems demand change in values, attitudes, and behaviors.

    o People's hearts and minds need to change, not only their likes and dislikes.

    o Problems surface that no existing technical expertise can solve.

    o Leaders ask questions that challenge people's beliefs.

    o Problems require a mindset shift that will result in some loss, especially for people who benefited from previous circumstances of patterns.

    o People are challenged to use their competence to bring about new solutions. Leaders bring people's attention to the problem and expect them to take responsibility for it.

    o Problem solving involves new experiments, uncertainty, and loss.

    Over the past decade we have seen a price bubble and the bursting of that bubble in real estate and common stocks. When the bubble burst, the historical relationships between all asset classes broke down. One would think that this breakdown of historical relationships would have been recognized as an adaptive problem, and over the past five years attempts of a new solution would have been encouraged by investment professionals.

    I am sorry to say that has not happened. In fact, over the past five years, the belief in the historical quantitative approach to investment management has not only been defended, it has increased its control over investment capital. I know this statement may cause some backlash in the investment industry, but all the solutions I have seen simply rearrange the data set and the math while keeping the basic concept the same. The majority in the wealth management industry has the belief that the problem is a technical problemand the solution is well within our abilities. I however think we need an overhaul of the actual belief system itself.

    The biggest challenge I see today is the relationship between interest rates and all other asset classes. From all the years that I have been helping people invest their savings, I know that there is a deep entrenched belief that bonds are safe and stocks are risky. Of course this belief has been rewarded over the past thirty years. It has been modeled into just about everyone's quantitative approach to portfolio management. Bonds are safe, stocks are risky! If this belief holds true then my concerns are just that, concerns. They will have no consequences.

    But what if over the next ten, twenty or thirty years this does not hold true. What if bonds are no longer the safe investments? What if bonds not only pay an interest payment less than the level of inflation, thus guaranteeing a real loss of capital, but also fail to be a secure source of capital preservation?

    As I write this, the city of Detroit has filed for protection under our bankruptcy laws. What will happen to the billions of dollars owed to bond owners? Will this give the go-ahead light to hundreds of other cash strapped municipalities that are having a difficult time paying the interest on their debt let alone the principal when promised?

    We believe that the next decade will be one that this underlying belief in the safety of bonds will breakdown. It is an adaptive problem that requires a new approach to portfolio management. It will require us to refrain from owning bonds or any other fixed income security with a maturity beyond a year or two until such time as interest rates exceed the rate of inflation with a good buffer to boot. It will require us to look at cash as a bond with a maturity of one day. It will require us to hold far more cash in our portfolios than we have in the past. It will require us to refrain from owning any interest rate sensitive security whose primary reason for purchase is current income. It will require us to be far more price conscience in the selection of common stocks as people will re-rate common stock prices lower with any increase in interest rates.

    Because of these requirements it will increase the time for our new clients to become fully invested. During a rising stock market this will require patience on the part of both us and our new clients as other than fully invested portfolios will not have the same short term results as our long-term clients. Even so, we believe that this is mandatory, as the risk associated with buying high is far greater than waiting and buying when prices are more reasonable. How long this will take is unknown, but it will happen.

    Until next time,

    Kendall J. Anderson, CFA

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirement for advisors. This commentary is for informational purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part 2 to a client in an authorized jurisdiction and receive a properly executed Investment Supervisory Services Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs’ Investment Objectives, individual account, individual security or index. Upon request, Anderson Griggs Investments will provide to you a list of all trade recommendations made by us for the immediately preceding 12 months. The authors of publications are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Investments’ office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.

    Aug 08 11:29 AM | Link | Comment!
  • Learning From Douglas H. Bellemore – One Great Teacher And Investment Counselor

    Sometimes, I think those of us in the investment business strive to obtain the abilities of Star Trek's Mr. Spock. Spock, the half-human half-Vulcan, learned to ignore the human emotions buried inside his self and use logic in order to solve the problems before him. Just think, what great investors we could be if we could simply control our human nature. As a Vulcan, we could construct an investment portfolio that would produce higher returns than any human could produce. As a Vulcan, we would not worry about commissions and taxes, or have any qualms about borrowing someone else's money to use and invest. After all, our Vulcan logic could easily create the portfolio that not only covers any and all costs, but would effortlessly reside on the "efficient frontier," where no man has gone before.

    Of course, striving to be a Vulcan carries a terrible price with it. Think of what your life would be like without joy, happiness, fear, love, anger, worry, greed, sadness, hopefulness, cheerfulness, sympathy, helplessness, excitement, relief...and so much more that makes us human. One of the characteristics of exceptional investors is their ability to understand those human emotions that impact our ability to profit through investing. A few of these individuals have shared their thoughts with us on this topic through their writings, including Douglas H. Bellemore.

    Doug Bellemore taught investments for 40 years at New York University's night school. I would have loved to have taken a course from him, along with many other excellent investors that chose to share their insight through teaching. But alas, I could only learn from them through the written word. I found out about Mr. Bellemore in a round-about way; by reading a court case. In the late 1960's Etson B. Jeffress the sole owner of Concord Mobile Homes sold his business to Champion Home Builders Company. Without getting into the details, a lawsuit ensued between the parties that ultimately led to a determination of liability through the courts. The experts involved in the valuation of Mr. Jeffress's company included a younger Martin J. Whitman (I have mentioned Marty Whitman many times as one of the nations great investors) and Douglas H. Bellemore. The courts use of the valuation models produced by these gentlemen and two others, Douglas A. Hayes and Baird P. Swigert, is still worth studying, for anyone interested in the valuation of business.

    In 1963 Simmons-Boardman Publishing Corporation published his The Strategic Investor. What follows are pages 23-25. Since Mr. Bellemore wrote this book, the size of the markets has increased dramatically in total value. In addition, new products and services created and offered by the financial services industry have changed the way a conservative or aggressive investor can participate in these markets. What Mr. Bellemore considered an aggressive or conservative investor doesn't have the same meaning in today's world. So as you read the passage, pay less attention to these descriptions and concentrate on the human characteristics that are just as important for all investors today as it was 50 years ago.

    Until next time,

    Kendall J. Anderson, CFA

    Characteristics For Success As Aggressive Investors

    By: Douglas H. Bellemore.

    Not all investors have the innate or acquired personal characteristics that are mandatory to succeed in building a portfolio of common stocks that will significantly outperform the market over the years.

    What are the traits required for success as aggressive investors? Basically they are five:

    1. Patience. The aggressive investor should not expect quick results although occasionally this occurs. Success depends, in large measure, on the ability to select undervalued situations not presently recognized by the majority of investors and to wait for expected developments to provide capital gains which may only come after several years. After the investment commitment has been made, he must calmly hold common stocks, perhaps five to eight years. Individual investment in this sense is not unlike corporate investment, in which management must wait in order to reap benefits of new investment programs. Results cannot be expected to come quickly. In fact, many of the personal qualities for successful business management are the same as those for an aggressive investor.

    2. Courage. The investor must have solid convictions and the courage and confidence emanating from them-that is, courage, at times, to ignore those who disagree. Resembling the courage displayed by top corporate management, it is tantamount to willingness to make and to accept responsibility for difficult decisions. Decision-making ability, which is the key to success in business, is vital to success in investing. Although not all decisions will be correct, a high majority must be.

    Decisions should be made only after careful analysis of facts and consideration of recommendations. But it is this willingness to differ and to accept responsibility that distinguishes the top executive and the top investor, assuming, of course, judgments are right more often than wrong.

    3. Intelligence. To realize success, the aggressive investor must possess average intelligence, but by no means does he need to be a genius. Intelligence alone, however, is by no means the only requisite for success. Common sense-impossible to test except by experience-is equally important in judgment decisions. Many highly intelligent investors have had poor investment records because they lacked common sense, i.e., the down-to-earth, practical ability to evaluate a situation.

    4. Emotional stability. Although akin to patience this trait is broader in scope. Initially, it is needed to prevent the investor from being engulfed in waves of optimism and pessimism that periodically sweep over Wall Street. Moreover, it is required to separate the facts from the entangled web of human emotions. Bernard Baruch said once that most facts reach Wall Street through "a curtain of human emotions," and even sophisticated professionals in Wall Street find difficulty in distinguishing fact from emotion.

    5. Hard work. To be successful an aggressive investor must do thorough research which requires considerable time and effort. He must be knowledgeable about the company in which he considers making an investment, the industry, the position of the company in the industry, and the place and future of that industry in the economy as a whole. Furthermore, he must do considerable financial analysis for which he must have some general knowledge of statements. Although not on the advanced level of a professional security analyst, he must adequately determine relative financial strength and earning power and project future earnings. The fundamentals of accounting and corporation finance can readily be self-taught for these purposes.

    Brokers, of course, through the services of their research departments are a great help in stock analysis and will do much of the work of ferreting out facts; nevertheless, the investor can never escape judging the facts himself, and this takes knowledge.

    6. Willingness to sacrifice the investment protection of diversification. Diversification based on the insurance principle can considerably reduce investment risks, although it cannot be achieved haphazardly. Nor can diversification be substituted for a certain amount of investment judgment, although a portfolio large enough to be distributed rather evenly among New York Stock Exchange stocks or all major industrial stocks would, for all practical purposes, reduce risk to that inherent in common stocks as a group. But diversification, say, among 20 or 30 stocks, cannot substitute for investment judgment.

    While the conservative investor relies extensively upon diversification to minimize risks, his aggressive counterpart must sacrifice wide diversification if his portfolio is significantly to outperform the general market. Although wide diversification reduces risks by offsetting mediocre selection with good ones, it also reduces substantially the profit or capital gain potential of a portfolio. Just as no speculator ever amassed a fortune while following the principle of diversification, no investor who expects his portfolio to outperform the averages significantly and to provide major capital gains can practice broad diversification.

    Finally, each investor must ask himself whether he meets the qualifications that have been discussed for successful investing. Failure to meet any of these makes it probable that by following an aggressive approach to investment, the investor will have a poorer record than if he adhered to the tenets held by the conservative investor. Should the investor decide to become conservative, he will at least have the satisfaction of knowing he should do considerably better than the unqualified investor who attempts to pursue aggressive tactics.

    There are no short cuts to successful investment for aggressive investors. To earn really sizeable capital gains requires substantially more effort, patience, courage, and intelligence, than that required of the conservative investor.

    It requires much more on all of these counts. As in other fields, the investor cannot get something for nothing. Once the investor has selected his own investment classification, he must pursue adamantly the principles of his particular group.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirement for advisors. This commentary is for informational purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part 2 to a client in an authorized jurisdiction and receive a properly executed Investment Supervisory Services Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs’ Investment Objectives, individual account, individual security or index. Upon request, Anderson Griggs Investments will provide to you a list of all trade recommendations made by us for the immediately preceding 12 months. The authors of publications are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Investments’ office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.

    Apr 03 8:42 AM | Link | Comment!
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