Be More Like Buffett: Buy Fear

Writing for Barron’s this week, Steven M. Sears deftly captures the aspect of buy low—sell high that renders this otherwise simplistic concept virtually impossible for most individual investors. Regarding the much-admired Warren Buffett, Sears says, “Few people have the guts to actually do what he says.” Case in point, Buffett says to be greedy when others are fearful and fearful when others are greedy. Sears hits the nail on the head however when he says that whenever people have the chance to be greedy, (when others are fearful) they tend to be too terrified to do anything.

My 15 years as a professional investment advisor bears this out. When, during fear-driven markets, I have advised buying attractively-priced securities, I’ve often received incredulous looks, as if I were completely out of my mind. On the flipside, I’ve also received strong-willed support for the exact same advice from other, steely-nerved clients who went on to benefit handsomely. This ability to overcome fear (and greed) during turbulent market cycles is undoubtedly one of the top predictors of investment success.

Read the full story here

Timothy R. Meyer
Meyer Capital Management
President & Chief Investment Officer

Focus On Making Money All The Time…Not Some Of The Time

Even during the best of times, the process of investing is fraught with uncertainty and risk. Think about that for just a moment. During the best of times? Uncertainty? Risk? Really? One could be forgiven for thinking that during the best of times things should be good, clear, predictable, maybe even safe. Frequently, that’s not the case. Often, for investors at least, the best of times and the worst of times look disarmingly similar.

We all know what the worst of times, or in this case, economic turmoil, looks like. It looks a lot like what we have now -- sluggish economic growth, abnormally low interest rates, high unemployment, fiscal crises at the state, federal and global levels, etc. What do the best of times look like? Typically, markets are moving broadly higher, corporate profits are strong, interest rates & inflation are low, and most investors are making money. Take note that there is no green light signal. Even though things are good, worried speculation on the street and in the news is invariably about over-valued assets and imminent corrections and/or contractions destined to send asset prices appreciably lower. Once again, this looks a lot like what we have now – markets moving higher, strong corporate profitability and, without a doubt, plenty of worried speculation.

Since good times and bad can appear the same to investors, switching back & forth between risk seeking (i.e., make money) and risk averse (i.e., avoid losing money) investment strategies is a fool’s errand. It’s much better, in my view, to remain focused on making money all the time and continuously employ investment strategies that are consistent with this stance. Importantly, this does not prevent or eliminate periods of negative investment rate-of-return. What it does do is tilt the odds in your favor that the positive cycle rates-of-return will more than offset the negative cycle returns leaving you, the investor, with a net gain.

Musings on 2011

A week into the New Year, I am reminded of the cottage industry that unfailingly produces a stream of “predictions & forecasts” this time every year. This isn’t a new phenomenon, of course, as we have looked to would-be wizards and wise men down through the ages to preview our fortunes. Taken with a grain of salt, I say “no harm/no foul” to the sport of New Year’s predictions, with one noteworthy exception: financial predictions.

Financial predictions take myriad forms--from which investments will perform best in the year ahead to where the stock market will end the year & everything in between. Financial prognosticators of all stripes make the predictions because they provide easy content for their TV shows, print publications, etc. and they are undeniably entertaining. The danger is that gullible investors bet real money--money they can’t afford to lose--on these highly uncertain outcomes.

To be clear, I revel in the promise and possibilities of the New Year as much as the next person. But rational investors, including me, will concentrate our focus on what we can control—not on what we can’t control. Future predictions and their outcomes are beyond our control and distract us from focusing on things we can actually do something about.

An old quote, “You can’t direct the wind, but you can adjust your sails,” reportedly a German proverb, provides us investors with all the guidance we need. Future predictions are nothing more than wind that will blow in every conceivable direction no matter what we do or don’t do. Our individual portfolios are our sails. This is where we should focus and make adjustments, as necessary. Asset allocation, diversification, risk assessment & mitigation, research, profit-taking & rebalancing, etc. are some of our tools. Not as dazzling perhaps as gazing into the night sky and pondering the stars, but more beneficial to our fortunes in the long run.

Timothy R. Meyer
President & Chief Investment Officer

Don’t Try This At Home

A new study of the municipal bond market by research firm Aite Group recently concluded that “do-it-yourself-investors” could be harmed if they attempt to invest in municipal bonds without the benefit of an expert advisor.

The study’s author, Aite Group Senior Analyst John Jay, says that a lack of AAA-rated supply, decrease in the issuance of insured muni bonds, the need for specialized knowledge, and the idiosyncratic ways muni bonds can trade combine to make it inadvisable for do-it-yourself-investors to wade into this market.

I have traded muni bonds professionally at Meyer Capital Management for years and I too have watched the fundamentals of the muni bond market change dramatically since the financial crisis. Research that took me hours before the financial crisis now routinely takes days; and I know what I’m looking for. Smaller inventories, less attractive yields, and uncertain credit quality all pose challenges.

The biggest challenge, however, is discerning the creditworthiness of the issuer and its ability to successfully payoff its muni bond debt. Reporting requirements for muni bonds aren’t as stringent as they are for corporate bonds, so reliable information is scarce if you don’t know where to look and how to read what you find.

A default on a muni bond can wreak havoc with any investor’s portfolio. Jay advises private investors “without the luxury and benefit of an advisor” to forego individual muni bonds and stick with muni bond mutual funds or ETFs. That’s good advice.

Are you a do-it-yourself-investor who buys/sells muni bonds for your personal portfolio? I’d like to hear about your experiences.

Melissa Donovan
Managing Director

"Fee-Based or Fee-Only". What's the Difference?

Nathan Bachrach’s recent Cincinnati Enquirer column (“Simply Money”, April 30, 2010) sought to address the questions: “What is the difference between ‘fee-based’ and ‘fee-only’ advisors, where else do fees come from, and how is it fair that fee-based advisors get a fee on my (investment) gain?” This issue continues to cause widespread confusion among the investing public and deserves a straightforward, plain English explanation.

A fee-only advisor can only receive compensation directly from you, the client. Period. This means the advisor represents you, and only you, when giving you advice or making investment decisions on your behalf. A fee-based advisor can receive fees paid by you, as well as commissions paid to them by a brokerage firm, mutual fund company, insurance company and/or other investment partnership. These multiple revenue streams, sometimes referred to in the industry as “double dipping,” are good for the advisor but can potentially cause conflicts of interest.

Investment portfolios developed by fee-based vs. fee-only advisors are likely to look different. Fee-only advisors have a fiduciary responsibility under the law to choose investments that are in your best interest. They typically use investments that have low internal expenses, such as individual stocks and bonds, no-load mutual funds and investments with no 12(b)1 fees. Fee-based advisors may or may not be fiduciaries(See Merrill Lynch Rule Exemption) and are financially incented by commission revenue to choose higher-cost investments for your portfolio.

How is it fair that an advisor charging a percentage of assets under management gets a fee on your investment gain? In my company’s case, it’s because in our 15-year history we have never raised our prices. We charge .35-1.0% annually for active investment management depending on the size of the account. By comparison, the average actively managed mutual fund charges nearly 1.5% annually, according to mutual fund research expert ICI.

Our costs of doing business, of course, increase every year. We cover these increases by doing what our clients hired us to do -- increase the value of their portfolios through expert investment management. If we don’t do our jobs well, clients lose money, we lose money and we’re out of business in short order. The performance risk is squarely on our backs. With no commission revenue to fall back on, we have to deliver for our clients in order to survive. This is why the vast majority of advisors are fee-based or commission-based and why respected personal finance columnist, Liz Pulliam Weston wrote, “True fee-only advisors are a rare breed. The leading association for fee-only advisors, NAPFA, has fewer than 800 members.” Conversely, FINRA, the leading stock broker association, claims 665,000 representatives.

Fee-based and fee-only are not the only compensation models clients have to choose from; there are at least four others. I agree that no single approach is best for everyone, but one of those approaches is best for you depending on your particular needs. In my case, I established a fee-only investment management company for one simple reason: It’s the way I would want my own money managed.