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Philip Merchant

(509) 886-7204

Our Investment Philosophy

Summer, 2014

There are many choices of professional help for the individual investor who wants to make the right decisions for his/her money. Along with the traditional banks, brokerages, and insurance companies, there are private equity firms, hedge funds, investment advisory firms, and even the local car insurance office. Each has many services to offer and ways to make money off of their customers. They all have their own investment philosophies. Here is ours:

  1. Accept Market Efficiency.
    • In 1965 University of Chicago economics professor Eugene Fama developed The Efficient Markets Hypothesis. This states that current securities prices rapidly reflect all available information and expectations. This means that active investment management cannot consistently add value through security selection and market timing. Even highly experienced mutual fund managers have a hard time beating the market.
  2. Markets can be chaotic, but over time they have shown a strong relationship between risk and reward. This means that the compensation for taking on increased levels of risk is the potential to earn greater returns.  There are three factors –or sources- of potentially higher returns with higher corresponding risks: 1. invest in stocks, 2. emphasize small companies, and 3. emphasize value companies. These three factors explain the majority of stock returns.
  3. Diversify Effectively
    1. Combine Multiple Asset Classes…that have historically experienced dissimilar return patterns across various financial and economic environments.
    2. Diversify Globally…more than 50% of global stock market value is non-U.S.; international stock markets as a whole have historically experienced dissimilar return patterns to the U.S.
    3. Invest in Thousands of Securities…to limit portfolio losses by reducing company-specific risk.
    4. Invest in High-Quality, Short Term Fixed Income…with lower risk and low correlations to stocks.
  4. Customize Your Portfolio
    • How you invest should be directly correlated to your time frame, risk tolerance, financial goals, and many other variables that all become part of the process of building a portfolio that is yours alone.
  5. Exercise Patience and Discipline
    • Successful investors stay focused on the long term. Trying to time the market can affect your long-term investing success. Review your portfolio regularly and make adjustments depending on changes in your life. You should also rebalance periodically to keep aligned with your goals.

You don’t have to predict the future to have a successful investment experience. Investing is not about winning and losing. It is not a competitive sport. It is not the case that if we are right we win and if we are wrong we lose. There are not winners and losers in our capital markets with the winners taking all the spoils and the losers going home broke. Of course there will always be some who become extremely wealthy and some who lose everything; but everyone who takes the time to address these five investment decisions can have a successful investment experience.

The wonderful truth of economics is that the return on capital is exactly equal to the cost of capital. Wealth is created when natural resources, labor, intellectual capital, and financial capital combine to produce economic growth. As an investor, you are entitled to a share of that economic growth when your financial assets are invested in and used by the global economy.

As Dan Goldie and Gordon Murray said in their book, The Investment Answer, “This is not a free lunch. It is your fair share of profits as compensation for putting your money to work.”

So how can you best capture your share? Merchant Advisory, Inc. believes it is by investing in the public fixed income and equity markets in a broadly diversified manner designed to capture a global capital market rate of return. While there are no guarantees, with the proper time horizon and discipline you can reach your financial goals and outperform most investors with less risk.

 

Note: Diversification does not guarantee a profit or protect against a loss. Foreign securities involve additional risks including foreign currency changes, taxes and different accounting and financial reporting methods.

The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility and loss of principal.