JULY 2012
The Most Important Thing
There are a small number of investment managers or analyst
thesized the first 9 of the original
who can demonstrate exceptional investment experiences and
most important things. Please find
also articulate their ideas and capture the attention of a read-
following the last nine. Keeping
ing audience. Howard Marks of Oaktree Capital is one
these insights within reach will
of the best at this. He has been asked over his career about
help any investor remain objective,
the most important thing required to be a good investor. After
moderate their emotions and find the
some reflection, he came up with 18 most important things
investment opportunities or mistakes created by those who do
(and since has added a couple more). Last quarter we syn-
not adhere.
11.
The most important thing is…combating
negative influences. The biggest investing
errors occur from the psychological
influences of greed, fear, willing
suspension of disbelief, tendency to
conform to the herd, envy from others
generating better results, and ego which
drives investors to think the principles
of risk and return do not apply to them.
The key is to see these things for what
they are and to resist their temptations by
understanding intrinsic value and cycles,
exercising humility and prudence, have
conviction and a willingness to be wrong
(or at least to appear to be wrong) and
having a support team of like-minded
colleagues.
12.
The most important thing is…
contrarianism. It is not enough to do the
opposite of what others are doing. By
logic and reasoning you must identify
despair-driven value or speculative overvaluation. This will lead to the conviction
necessary to be wrong while the rest of the
herd is moving in another direction.
continued...
13.
14.
15.
16.
The most important thing is…
appreciating the role of luck. Random
and improbable outcomes occur all
the time. It is important to recognize,
accept and adjust to these inevitabilities.
However, an investor has a better
probability of reward if his decision
is one that is logical, intelligent and
informed made under the circumstances
as they appeared at the time.
The most important thing is…finding
bargains. Investment value is found by
buying assets that are cheaper relative
to your other choices. Their value is
typically created by bad experiences
of the company or under-appreciated
attributes. The key is to buy them as a
result of thoughtful analysis when the
perception is worse than the reality.
The most important thing is…patient
opportunism. Good investments cannot
be forced or created by an investor.
They will be created by specific business
risks or market forces. It is through
analysis and time that the opportunities
are created. To assure that these
opportunities are there an investor must
have a staunch reliance on value, little or
no use of leverage, committed long-term
capital and a strong stomach.
The most important thing is…knowing
what you don’t know. The future is
largely unknowable which puts limits
on our foreknowledge and forecasting.
Acknowledging the boundaries of what
you can know…and working within those
limits rather than venturing beyond…can
give you a great advantage.
The most important thing is…having
a sense of where we stand. Cycles are
inevitable, as are the ups and downs
associated with them. Cycles are
unpredictable as to their extent, and
especially their timing. They will
undoubtedly influence performance.
So the key is to understand where we
stand in a cycle and through inference
determine what it may imply about the
future. Where we are is often easier to
understand than where we are going.
17.
18.
The most important thing is…investing
defensively. Worrying about the
possibility of loss is essential. Worrying
about something you don’t know is
rational. Investing scared will prevent
hubris; will help you keep your guard
up and mental faculties acute; will make
you insist on a margin of safety; and will
increase the chances that your portfolio
is prepared for things going wrong. And
if nothing does go wrong, the winners will
take care of themselves.
The most important thing is…avoiding
pitfalls. Errors are primarily emotional/
psychological or analytical/intellectual.
Pitfalls are created when too much
capital creates an environment of
expected lower returns and a disregard
for risk. Leverage magnifies the
outcomes in this environment. And
psychological and technical factors
overshadow fundamentals. Excesses are
ultimately corrected. A key to avoidance
is to understand where we are in the
credit cycle and where the fundamental
value of assets lies.
PETER R. ABULS
Senior Vice President,
Investments
T 312.869.3843
RICHARD A. BONE, CFP®
Senior Vice President,
Investments
T 312.869.3844
JAMES A. ELLER
Senior Vice President,
Investments
MICHAEL G. PAJAK
Financial Advisor
T 312.869.3846
KAREN M. CARSELLO
Senior Registered Client
Service Associate
T 312.869.3848
JENNIFER M. SCHOLS
Senior Registered Service and
Marketing Associate
T 312.869.3847
T 312.869.3845
550 West Washington Boulevard, Suite 1050
Chicago, IL 60661
abepcs.com
T 800.543.5304
F 312.869.3838
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC
Required Disclosures
Views expressed in this newsletter are the current opinion of the author, but not necessarily
those of Raymond James & Associates.. The author’s opinions are subject to change
without notice. Information contained in this report was received from sources believed
to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future
results. Investing always involves risk and you may incur a profit or loss. No investment
strategy can guarantee success. International investing involves additional risks such as
currency fluctuations, differing financial accounting standards, and possible political and
economic instability. These risks are greater in emerging markets. There is an inverse
relationship between interest rate movements and bond prices. Generally, when interest
rates rise, bond prices fall and when interest rates fall, bond prices rise. Commodities are
generally considered speculative because of the significant potential for investment loss.
Commodities are volatile investments and should only form a small part of a diversified
portfolio. There may be sharp price fluctuations even during periods when prices overall
are rising. Investing in small and mid-cap stocks are riskier investments which include price
volatility, less liquidity and the threat of competition. Business related to a specific sector
is subject to fierce competition and their products and services may be subject to rapid
obsolescence. There are additional risks associated with investing in an individual sector,
including limited diversification. Dividends are not guaranteed and will fluctuate. While
interest on municipal bonds is generally exempt from federal income tax, it may be subject
to the federal alternative minimum tax, or state or local taxes. In addition, certain municipal
bonds (such as Build America Bonds) are issued without a federal tax exemption, which
subjects the related interest income to federal income tax. Municipal bond investments may
involve market risk if sold prior to maturity, credit risl and interest rate risk. US government
bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer
a fixed rate of return and guaranteed principal value. US government bonds are issued and
guaranteed as to the timely payment of principal and interest by the federal government.
Treasury bills are certificates reflecting short-term (less than one year) obligations of the US
government. Diversification and strategic asset allocation do not ensure a profit or protect
against a loss. Investments are subject to market risk, including possible loss of principal.
Gross Domestic Product (GDP) is the annual market value of all goods and services produced
domestically by the US. Alternative investment strategies involve greater risks and are only
appropriate for the most sophisticated, knowledgeable and wealthiest of investors. Highyield bonds are not suitable for all investors. When appropriate, these bonds should only
comprise a modest portion of your portfolio. Treasury Inflation-Protected Securities (TIPS)
provide protection against inflation. The principal increases with inflation and decreases
with deflation, as measured by the Consumer Price Index. At maturity you are paid the
adjusted principal or original principal, whichever is greater. Increases in TIPS principal
value as a result of inflation adjustments are taxed as capital gains in the year they occur,
even though these increases are not realized until the TIPS are sold or mature. Conversely,
decreases in the principal amount due to deflation can be used to offset taxable interest
income. Price Earnings Ratio (P/E) is the price of the stock divided by its earnings per share.
The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets.
The Russell 2000 index is an unmanaged index of small cap securities which generally
involve greater risks. The MSCI World Index is designed to measure the equity market performance of developed markets. It tracks 23 countries including the United States. Barclays
Capital U.S. Aggregate Bond Index is made up of the Barclays Capital U.S. Government
/ Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Based Securities
Index, including securities that are of investment grade quality or better, have at least one
year to maturity, and have an outstanding par value of at least $100 million. The MSCI
EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered
representative of the international stock market. These international securities involve
additional risks such as currency fluctuations, differing financial accounting standards, and
possible political and economic instability. The Dow Jones-UBS Commodity Index aims to
provide broadly diversified representation of commodity markets as an asset class. The
STOXX Europe 600 Index represents large, mid and small capitalisation companies across
18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. It is not possible to invest directly in an index.
The NASDAQ Composite Index is an unmanaged index of all stocks traded on the NASDAQ
over-the-counter market. The Dow Jones Industrial Average is an unmanaged index of 30
widely held securities. The Wilshire Real Estate Securities Index measures the performance
of publicly traded U.S. real estate securities. The Barclays Capital U.S. Corporate High-Yield
Bond Index covers the universe of fixed-rate, non-investment grade corporate debt of issuers
in non-emerging market countries. Eurobonds and debt issues from countries designated
as emerging markets are excluded. The Barclays Capital Long-Term Municipal Bond Index
is composed of those securities included in the Municipal Bond Index that have maturities
greater than 22 years. It is not possible to invest directly in an index. The Consumer Price
Index (CPI) is a measure of the average change in consumer prices over time of goods and
services purchased by households; it is determined monthly by the U.S. Bureau of Labor
Statistics. This analysis does not include transaction costs and tax considerations. If
included these costs would reduce an investor’s return.
Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®,
CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo) in the
U.S., which it awards to individuals who successfully complete CFP Board’s initial and
ongoing certification requirements.