Multi-Unit Franchisee Magazine Issue IV, 2011 | Page 72
InvestmentInsights
by Carol Clark
Structurally Sound
A timeless approach for the 21st century
A
s I wrote last issue, “the factors that must be accounted for while structuring financial affairs are
much more complicated than ever before.”
Given that 400- to 500-point swings in the
Dow have nearly become the norm rather than the exception, this is ringing even truer today than it did a quarter or
two ago. In the previous issue, I outlined the structural and
emotional changes that we suspect have primed the markets
for their current volatile behavior. I also promised to bring
a few ideas for how to keep your wits about you amidst the
chaos, so here goes:
1) Give lots of thought and analysis to strategic asset allocation.
Many studies show that the preponderance of investment return comes from
asset classes you are in for the long pull.
It makes sense. If you were in CDs for the
past 30 years, your returns were different
than if you were in a private business, real
estate, or the stock market. Have a solid
grasp of what you want and need your
funds to do for you. Money you are investing for retirement in 20 years should
be in different vehicles than money you
need for your child’s tuition in the fall of
2012. End uses should dictate what types
of investment buckets you can and should
consider. But (and this is big)…
2) Pay attention to tactical asset allocation.
Blindly assuming which buckets should be
targeted and then slapping on percentage ranges with no eye
toward the valuation of a specific asset class can do as much
harm as help in the long run. For some perspective, think
tech stocks in 1999 or financial stocks in 2007. These are the
shifts that can probably provide the biggest boost or detriment to your overall progress. Often this entails adopting a
contrarian stance. Stocks aren’t always the riskiest asset class
(think valuations in March 2009 or at the bottom in 1987).
Nor are bonds always the safest (think the negative yields of
late 2008 or the volatility witnessed recently in even a fiveyear Treasury note).
3) Look for a well-reasoned, soundly developed process that will
stand the test of time and market/economic cycles. This goes for
analyzing individual companies as well as potential mutual
funds or money managers. Buying investments is not like
buying lottery tickets, for example, and CNBC should not
be driving your decision-making process. In fact, CNBC can
often be viewed as the infomercial of the investment world.
The market’s day-to-day gyrations are often more reflective of
emotions run wild than they are a testament to fundamentals.
4) The starting valuation is a critical variable. This ties closely
to having a firm grip on the intrinsic value of the asset or
manager you’re contemplating for selection. It often entails
analysis of cash flow, compensation structure, fees, and incentives. Do CEOs and senior managers have substantial
stakes in the company they are overseeing? Does a portfolio
manager have their net worth in the fund(s) they run? It’s
vital to consider if the price you are paying leaves room for
things to go wrong, a “margin for error.”
It’s also important to understand and adjust for factors such as illiquidity and high
performance fees. Wall Street has gotten
very creative about generating “product”
and taking a piece of the action on both
sides of a transaction. Keep the analysis
as simple and basic as you can. Where are
the fees? Where are the cash flows? Where
are the incentives and the motivation? Just
because it’s the latest and greatest synthetic
vehicle doesn’t mean it’s being crafted to
serve your risk management or return needs.
Our day-to-day world is rife with
a wider range of potential events than
perhaps at any time in investing history.
Compounding this situation are a bigger
selection of vehicles to participate in and
an expanded “sandbox” in which to find them (i.e., global
versus local investing). The temptation to shut down and
do nothing, or to manically chase what everyone else is doing, can feel overwhelming. However, paying attention to
some of the basics from those “good old days” just might
be the ticket to preserving your sanity and your financial
wherewithal.
Paying attention
to some of the
basics from those
“good old days”
just might be the
ticket to preserving
your sanity and
your financial
wherewithal.
70
Carol M. Clark, CFA, is a partner and investment principal of Lowry Hill, a private asset
management firm that provides proprietary investment management and financial services to
families, individuals, and foundations with wealth
greater than $10 million. The firm manages approximately $5.2
billion in assets for nearly 300 families and 58 foundations from
offices in Chicago, Minneapolis, Naples, Fla., and Scottsdale, Ariz.
She welcomes questions and comments at [email protected].
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