Investment Philosophies in 10 Words or Less

Great investors summarize their investment philosophies.

In 2012, writing in the Wall Street Journal, Jason Zweig penned an article, “Can You Sum Up Your Investing Philosophy in 10 Words?”This semester the students in Marquette’s AIM program are studying different approaching to investing. They are starting with the topic of understanding different investment philosophies.

An investment philosophy is defined as a coherent way of thinking about markets, how they work (and sometimes do not) and the types of mistakes that you believe consistently underlie investor behavior. An investment strategy is actually much narrower – another topic that the AIM students will be studying this fall.

Zweig asked some leading investors and financial thinkers for their own contributions. Here are a few:

Determine value.  Then buy low, sell high.  David Herro, chief investment officer for international equities, Harris Associates, and manager of Oakmark International Fund

If everybody wants it, I don’t. Avoid crowds.  Gus Sauter, chief investment officer, the Vanguard Group

Other people are smarter than you think they are.  Index.   Laurence B. Siegel, research director, Research Foundation of the CFA Institute

Risk means more things can happen than will happen.   Elroy Dimson, expert on long-term stock returns, London Business School, and co-author, “Triumph of the Optimists”

Invest for the long term and ignore interim aggravation.   Charles D. Ellis, director, Greenwich Associates, and author, “Winning the Loser’s Game”

100% of business value depends on the future.  Bill Miller, chairman and chief investment officer, Legg Mason Capital Management

Plan for the worst. Hope for the best.  Robert Rodriguez, managing partner, First Pacific Advisors

Control what you can: your savings rate, costs, and taxes. Don Phillips, president, fund research, Morningstar

In the end, you cannot take your investments with you.    Meir Statman, finance professor, Santa Clara University, and author, “What Investors Really Want”

The less portfolio management costs, the more you earn.   Burton Malkiel, professor of economics emeritus, Princeton University, and author of “A Random Walk on Wall Street”

Own competently managed, competitively advantaged businesses at discounted prices.  O. Mason Hawkins, chairman and chief executive officer, Southeastern Asset Management

Do the math. Expect catastrophes. Whatever happens, stay the course.  William J. Bernstein, Efficient Frontier Advisors, and author, “The Four Pillars of Investing”

Fallible, emotional people determine price; cold, hard cash determines value.  Christopher C. Davis, chairman, Davis Advisors and co-manager, Davis New York Venture Fund

Save. Invest long-term. Compounding returns builds. Compounding costs destroys. Courage!  John C. Bogle, founder, the Vanguard Group

Are you smarter than the average professional investor? Probably not. William F. Sharpe, emeritus professor of finance, Stanford University, and Nobel Laureate in economics

Spend less.  Diversify globally.  Own whatever’s feared, shun whatever’s beloved.  Robert D. Arnott, chairman, Research Affiliates LLC

The great investing analyst Benjamin Graham engaged in a similar exercise but came in at seventeen words: Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” Benjamin Graham, “The Intelligent Investor,” Chapter 20.

Warren Buffett is the most successful investor of our time, perhaps of any time. He is famous for his pithy and witty quotes, which often appear in his annual letter to shareholders. Taken together, his quotes pretty well sum up his investment philosophy and approach. Here are his best sound bites on investing:

·         Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

·         Never invest in a business you cannot understand.

·         I put heavy weight on certainty. It's not risky to buy securities at a fraction of what they're worth.

·         If a business does well, the stock eventually follows.

·          It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Marquette University AIM Program Open House, Friday September 4th 2:00-3:00

AIM Program Open House

Where:  Straz Hall 488, AIM Research Room

When:  Friday, September 4^th, 2:00 - 3:00 pm

2:00-2:20 – General AIM program information (Dr. Krause and AIM seniors)

2:20-2:40 – Discussion of the AIM program application process

2:40- 2:50 – Business Career Center presentation

3:00 - 4:30 pm AIM Students Equity presentations

Other Dates of Interest:

9/11/15 – AIM application deadline

10/3/15 – AIM Super Saturday

10/21-24/15 – FMA NYC Trip

4/9/16 – Ins and Outs of Wall Street

Mike McGuire and Ray Auth Visited the AIM Program This Past Week

On Friday, August 28, Michael McGuire and Ray Auth visited Dr. Krause and assisted in the process of interviewing potential Class of 2017 AIM candidates, who are headed abroad for the semester. Krause said, “I appreciate all of the support from our alumni. Both Mike and Ray also provided some unique and creative ideas about how to keep the AIM program on the cutting-edge. You’ll learn more about their ideas this semester.”

Mike McGuire is the Research Director and Principal at Northwest Passage Capital Advisors, which is a Milwaukee-based active fixed income investment manager focused on emerging markets debt. They advise institutional clients on blended USD/local currency emerging market mandates on a separate account basis, delivering "core-plus" exposure to the EMBI, CEMBI, and GBI-EM emerging market debt universes on a customized basis. The firms’ principals have over 50 years of direct investing experience in fixed income and emerging markets, and bring a focused top-down sovereign credit approach to our investment process. Founded in 2013, they currently manage more than $500 million in client assets and more information about the firm can be found at: http://www.nwpcapital.com.

Ray Auth, CFA, Director, Northwestern Mutual, was a member of the first AIM class (2006). He works in the area of Investment Strategy and Portfolio Management at Northwestern Mutual Investment Management Company. He is on a team that sets investment strategy, performs strategic and tactical asset allocation and aggregate portfolio management for the firm's general account and related companies. The Northwestern Mutual Company is one of the largest U.S. financial services mutual organizations – it is based in Milwaukee.  Its products include life insurance, long-term care insurance, disability insurance, annuities, mutual funds, and employee benefit services.

Comments on the Global Stock Market Chaos by Dr. David Krause, AIM Program Director, Marquette University

Relax – we’ve been here before. We are not in the midst of a financial crisis or global recession – what I believe we are witnessing is the result of an inefficient stock market in China coming back to earth. As most of my students over the years have learned, I do not believe that technical analysis is a sound method to invest in common stocks.

What is technical analysis? It is the use of stock price charting patterns and is a common form of analysis utilized by a particularly large number of Chinese retail traders and investors. Very few academics and equity portfolio managers utilize technical analysis for their long-term investment decisions. Fundamental analysis of the economy, industries and individual companies is predominantly used by institutional investment professionals to select over- and under-valued stocks – and it is the methodology that economic theory and empirical evidence support.

The Chinese stock market is largely driven by unsophisticated retail traders, who believe that charting or technical analysis is the best method to select stocks. The truth is that it is an ineffective and unreliable basis for investment decision making. It is mainly responsible for the large swings in the Chinese stock market during the past year.

There is overwhelming, robust empirical evidence from reputable peer-reviewed studies that support my contention that technical analysis is unreliable and likely to lead to irrational market movements and losses for the majority of investors who use it. And that helps explain the ridiculous and crazy movements of the Chinese stock market over the past year. The fear of a Chinese economic slowdown – which could lead to contagion into the developed economies (i.e. United States, Germany, Japan, United Kingdom, etc.), is overblown and the stock markets in the major countries will soon return to normalcy.

Academic research has consistently shown that individual investors managing or trade their own money lose on a relative basis approximately 50 basis points (1/2%) per month in raw returns plus an additional cost of 20 basis points due to higher turnover. These 70 basis points of total costs per month is a significant under-performance compared to other investors who utilize stock market indexes (ETFs) and mutual funds.

The situation is worse for those individual "investors" who use technical analysis. The cost of using technical analysis for high turnover traders has been estimated to be 140 basis points per month plus an extra cost of about 30 basis points due to additional transaction costs associated with technical analysis generating more trades. That can amount to net returns being 20% below the market averages over the course of one year.

The current market selloff started with concerns about global growth forecasts, especially in China and oil exporting countries. Evidence does exist that points to a slowing of economic prospects for China and other countries in the emerging world, along with weak growth in Western Europe and Japan. Fundamental factors, such as earnings and capital investment, do point to a global slowdown, but not a global recession. U.S. growth will remain below 3% annually, a lower than normal rate, but decent compared to Western Europe and Japan.

The selloff in China was accelerated by retail investors, who primarily employ technical analysis, fleeing the market. Pundits can talk about Chinese government policy makers not able to respond quickly enough; however, markets eventually find their equilibrium levels

I believe that the U.S. markets will be fine and that investors should not panic – and above all, not sell at the market bottom. I believe that China and some of the emerging markets will still be in for a bumpy ride, but that ultimately the stock prices will catch up with the fundamentals and they will stabilize.

The lesson for retail investors across the globe should be to avoid technical analysis and focus on long-term fundamental based investing. And if you don’t have enough time to do your own analysis, then by all means utilize mutual funds or ETFs, and remain focused on the long-term. The current  stock market chaos will soon disappear and we’ll be back talking about Donald Trump and the upcoming football season!

 

 

Watch the introduction to Dr. Krause's new course: BUAD 2930 - The Investment Industry

Starting this fall a new online course focusing on the investment industry will be offered at Marquette University. Dr. David Krause has created a non-quantitative course with the objective of providing a clear understanding of investment industry fundamentals. He said, "The curriculum is aimed at non-finance students who have an interest in investments, including those who wish to enter the financial services industry, as well as those who are already working within it."

The underlying curriculum, known as the Claritas Program (http://www.cfainstitute.org/programs/claritas), was developed the CFA Institute® with the goal of helping to shape a more trustworthy financial industry by setting new standards for investment education and ethics.

You can watch the introduction to the course on YouTube at: https://www.youtube.com/watch?v=vm9FhGJ_J50 or by clicking on the video below.

Offered online, this is a non-quantitative course provides an overview of the essentials of the investment industry. Topics include the types and characteristics of financial securities, investment industry structure and controls, and ethics and regulation. The material covered includes an introduction to the essential business areas of accounting, macroeconomics, microeconomics, international trade, and statistics. It has been designed to prepare students to sit for the Claritas® Investment Certificate exam. Not offered as a business course for credit for business majors. Grading: Satisfactory/Unsatisfactory. Prerequisites: Sophomore standing.

Contact Dr. Krause for more information:

David S. Krause, PhD

Director, Applied Investment Management Program

Marquette University

College of Business Administration, Department of Finance

436 Straz Hall, PO Box 1881

Milwaukee, WI  53201-1881

Telephone: (414) 288-1457     Fax: (414) 288-5756

E-mail:  david.krause@marquette.edu

New course this fall: BUAD 2930 Special Topics in Business: The Investment Industry (3 credits)

Dr. David Krause has created a new course that will be offered this fall at Marquette University. The course is: BUAD 2930 - Special Topics in Business: The Investment Industry (3 credits). 

Class#  Subj.#                  Title 

6301      BUAD 2930-101  The Investment Industry

This is a non-quantitative survey course of the investment industry with the objective of providing a clear understanding of investment industry fundamentals. The curriculum is aimed at non-business students who have an interest in investments, including those who may wish to enter the financial services industry and those who are already working within it. The underlying curriculum, known as the Claritas Program®  (http://www.cfainstitute.org/programs/claritas), was developed the CFA Institute® with the goal of helping to shape a more trustworthy financial industry by setting new standards for investment education and ethics.

Offered online, this is a non-quantitative course provides an overview of the essentials of the investment industry. Topics include the types and characteristics of financial securities, investment industry structure and controls, and ethics and regulation. Includes an introduction to the essential business areas of accounting, macroeconomics, microeconomics, international trade, and statistics. Designed to prepare students to sit for the Claritas® Investment Certificate exam. Not offered as a business course for credit for business majors. Grading: Satisfactory/Unsatisfactory. Prerequisites: Sophomore standing.

For additional information, please contact the instructor:

David S. Krause, PhD
Director, Applied Investment Management Program
Marquette University
College of Business Administration, Department of Finance
436 Straz Hall
Milwaukee, WI  53201-1881
Telephone: (414) 288-1457  

E-mail:  david.krause@marquette.edu