Kendall J. Anderson, CFA Complimentary Copy
May 15, 2011
There Can Be Only One
Most of you know that my wife Kathy is a School Psychologist. One of the few remaining benefits that a public school employee receives in South Carolina is a spring break. This year Kathy, along with a few friends used this little break to maneuver their kayaks’ down the Silver River in Central Florida. The river is quite famous because of its troops of Rhesus monkeys. Legend has it that the Rhesus troops are the descendants of the escapees from the great Tarzan films shot at Silver Springs, Florida.
Maybe you think the term “great” is not how you would describe the Tarzan movies. But to me they should have won the Academy Award. How else could a little guy growing up in Webster City, Iowa go on an adventure to places where wild animals roamed, where danger lurked around every corner and the hero always won, other than at the movies?
Maybe it was those same movies that set the stage for my lifelong enjoyment of action adventure movies. Of course it could also be that I’m just like millions of other men that enjoy movies where the man is a real man, strong, intelligent and handsome. He not only has all these great characteristics, but he always wins whatever struggle is set in front of him.
My passion for action adventure movies doesn’t sit so well with Kathy. So her recent trip to Florida gave me the opportunity to watch as many action movies as time permitted. Besides a few new ones, I took the time to watch an old favorite from 1986, the movie “Highlander”, the epic story of Connor MacLeod. The movie begins with Connor’s discovery that he is an immortal. That he lives with one rule, that “There can be only one” and is destined to fight all other immortals until just one was left who wins “The Prize”.
All professionals and individual investors are seeking their own prize of higher returns. Each will follow one of these methods; Market Trading, Focused Trading, Buying Low and Selling High, Buy and Hold or Buying Bargains. Each method offers the potential to create wealth and each has its own group of true believers. It is the true believers that follow Connor MacLeod’s rule of “There can be only one” and it is their chosen method that will ultimately win the prize.
The Five methods
Market Trading– making investment decisions based on your ability to anticipate changes in the movement of the total market that is reflected in an unmanaged index.
Focused Trading– making investment decisions based on your ability to choose an individual issue or derivative that will do better than the market in a short period of time.
Buying Low and Selling High– You will buy only when the markets have fallen and the average investor has sold out of fear, then sell when the average investor enthusiasm has driven the market to new highs.
Buy and Hold– You will buy shares of an individual company’s securities based on your belief that the company will prosper long into the future at a rate greater than the average company.
Buying Bargains– You will invest only into securities that you believe are selling at a price well below the true value that you have determined.
Market and Focused Trading
As I look through the financial headlines each day, there is no doubt that the world of investing is dominated by believers in Market Trading and Focused Trading. To be honest, I personally do not consider trading the market or the short term trading of individual securities as investing. I would call it speculating. Speculating is the opposite of investing, which I would describe as a method that relies on analysis to preserve wealth while offering a satisfactory rate of return over time. To meet our investment requirement, a successful market or focused trader must not only be able to tell the future accurately, but also has to forecast it better than every other competitor in the field. In other words he would have to profit from prophecy.
In the 30 years I have been in this business I have yet to find or meet a successful trader. This record indicates to me that the ability to make a satisfactory rate of return over time through market or focused trading is near impossible. Oh, I have met a few that were successful in a short time period, but they have always left the game losing money. I am sure that someone out in the world has made profits and kept them. However, these people would have to be classified as “truly gifted” with some extraordinary talent. The majority of individuals who attempt these methods to gain wealth either lack common sense, or are playing the game just for fun, and losing money is not important to them.
Buying Low and Selling High
The most famous method of investing is to Buy Low and Sell High. I am sure that some of you will simply tell us that Buying Low and Selling High is just another method of Market Trading. Yet this method is quite the opposite of our first two. The first consideration in buying low is the value received from the current assets, earnings, and dividends today, with little consideration for any future movement in the market. A person following this method can be quite satisfied with their investment for years even if the market price is stubborn and refuses to move higher. History has shown that if you could buy during or shortly after a market crash you could have been able to sell out a few years later and walk away with a substantial profit.
Yet, just as I have not met any successful traders, I have not met many individuals who have been successful buying low and selling high. The greatest reason may simply be that people, are well, just people. We see patterns in just about everything. Because of this, when the market is going up, we expect it to continue going up. When it’s going down, we expect it to continue going down. Because of this, almost no one buys when the market is low and they will never sell when the market is high. This is backed up by research galore. One of the latest studies I have seen came from John Bogle, the founder of Vanguard group. He examined exchange-traded-funds for five years ending in mid-2009 and found that investors earned 4.5% less than the reported returns of the ETFs they owned. The most likely reason being, that people bought the funds after they had gone higher and sold after they went down.
I would have to include the method of buying low and selling high as investing because the method meets my definition. Buying low has had a history of providing positive returns over time and in my book, buying assets cheap is the best way to preserve wealth. It is a method that has promise but is difficult to near impossible to implement.
Buy and Hold
The buy and hold method has come under a great deal of criticism in the past few years. How many times have you heard that buying stocks ten years ago made zero returns, therefore only naïve individuals would buy and hold. Thus the common belief is that intelligent investors should become market or focused traders. This is another example of seeing patterns. Yes, the last ten years has not been good to the buy and hold investor. I’ll agree, but the results are not normal results. Besides it is not the way people invest. They do not make one single decision to put all of their money into the market at one time and never add or subtract cash. No, the more typical individual will accumulate a few extra dollars and invest those funds when they can. Or they will buy through some systematic process such as a 401K retirement plan. These individuals, whether they are professionals, wealthy or just the average middle class American can be quite satisfied using a buy and hold method combined with the dollar cost averaging of their actions.
If you utilize a buy and hold method and incorporate a process of selecting individual securities, in lieu of buying the market through a fund, your results can be very rewarding. I have lots of stories of people who I have visited with that are wealthy today because they used a buy and hold method. The best was of a client whose father received 100 shares of common stock in a little bank in the North Carolina Mountains in combination with a $5,000 life insurance policy. For some reason, the stock wasn’t considered worthwhile, so this individual’s Dad set it aside and never looked at it. The son brought the certificate to me when his father died to see if it had any value. Little did he know that he had a certificate that was worth well in excess of $1,000.000.00. The bank had been purchased by another, then another, and another and one more time. The life insurance policy paid their heirs $5,000.00.
Even though this gentlemen’s Dad did not choose this company, hundreds of companies have tripled or quadrupled their earnings and dividends over a period of years. The market price has reflected this growth and provided respectable returns. Of course, it can also lead to failure as many companies have failed to grow and the result was a substantial loss of wealth.
I include the buy and hold method as investing. The key to preserving wealth and making a satisfactory rate of return over time requires intelligence and good judgment, which is not easy to accomplish. There will be times when your judgment will be in direct conflict with the majority. The rewards are there, yet the probability that you can foresee the future growth of a company beyond what other see is small.
Buying Bargains
The concept of buying bargains is perhaps the most difficult to deploy yet provides great opportunity to those who choose this approach. It is by far the most difficult of the methods available to you as it requires a skill not easily obtained along with psychological qualities of steel.
In the public markets, a security will have a bargain price only when the majority of investors believe that something is terribly wrong with the company itself. Just as the total market will fall well beyond any reasonable level of value when the public is driven by the fear of the total loss of their money, an individual security can fall well below its value because its future is questionable. However, unlike a fear driven market sell-off, individual companies can be priced at a bargain level at any time, including a generally rising market, or even during periods of market euphoria.
The current market price of a stock or a bond can be depressed for many and varied reasons. It could be the result of an unfavorable outlook for the industry. It could be the result of a perceived slow-down in the expected growth of earnings or sales. It could be for a legitimate financial quality concern. In today’s world of the rapid trading of ETFs, it could be as easy as being thrown out with all the other underlying securities that create the ETF. Think of this as throwing the baby out with the bath water.
Buying bargains meets my definition of investing. Of all our methods it requires the greatest level of skill. It is not the approach that an individual with limited financial training and/or a limited amount of time to research an opportunity should use. For the professional, it provides a very isolated and sometimes a depressing method to pursue. But, if your research is sound, it will provide you the courage to buy when others are selling. Your research can comfort you when others are criticizing you and your skills. It allows you to have the patience needed to hold on until the problems that created the bargain are solved. It also gives you a very real advantage of being able to offer your clients something of value that they cannot accomplish without your analytical skills. It is the method we employ at our firm.
A Final Note
I am sure that a few of you with a long memory are saying to yourself “I’ve read this before”. You may have, as the concept of this letter was taken from what I consider “The Prize”, a short book written in 1949 and titled “The Intelligent Investor” by Benjamin Graham. The later edition is available at most book stores, but the 1949 edition is special.
Until next time,
Kendall J. Anderson, CFA
Anderson Griggs & Company, Inc., doing business as Anderson Griggs Portfolio Management is a registered investment adviser with the US Securities & Exchange Commission. Pursuant to laws and regulations Anderson Griggs also maintains notice filing with several individual state regulators including North and South Carolina. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirement for advisors. This letter has been sent to you for information purposes only and is not an offer of investment advice. The purpose of this letter is to provide information about us. We will only render advice after we deliver our Form ADV Part II to a client in an authorized jurisdiction and receive a properly executed investment Management 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 Objective, individual account, or index. 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 Portfolio Management’s 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.
Anderson Griggs Portfolio Management
“Common Sense Investing for Intelligent Investors”
Accepting new clients with a minimum portfolio value of $100,000.00
113 East Main Street, Suite 310, Rock Hill, SC 29730
800-254-0874 803-324-5044
Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments is a registered investment adviser. Anderson Griggs Investments only conducts business in states and locations where it is properly registered or meets state requirements for advisors. This commentary is for information purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part II 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 Objective, individual account, or index. The authors of publication 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 Investment's 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.