STUDIO has 20 key investment beliefs:
1) Good investors attempt to preserve capital first. They pursue returns second.
2) Risk is not measured by historical volatility, or fluctuations in prices. Evaluations of risk need to consider the likelihood of loss and the prospective magnitude of such loss.
3) The price paid is the most important determinant of the success of an investment. There must be a fundamental basis for determining that sufficient value is received for the price paid. And a margin of safety should be built into one’s determination of value.
4) Long-term investment success is best achieved by focusing on two issues: 1) the long term and 2) PRICE!
5) Short-term investment success is best achieved by focusing on two issues: 1) the long term and 2) PRICE! Unfortunately, regardless of one’s approach, short-term investment success occurs about 51% of the time.
6) Real returns – investment returns after subtracting inflation – should be emphasized. Eight percent investment returns are worth more when inflation is three percent than when it is seven percent.
7) We do not believe that risk and return are always correlated. This is in contrast with the assumptions of Modern Portfolio Theory (MPT), a widely practiced, Nobel-prize-winning theory. We believe MPT’s definition of risk is problematic and its assumptions are questionable in light of behavioral finance challenges.
8) Typical industry benchmarks encourage relative results and discourage risk distinctions. We prefer a focus on absolute, long-term, after-tax, real returns, with a thoughtful consideration of downside risk.
9) We believe financial markets are efficient (i.e., fairly priced) at the individual-security level most of the time. However, we also believe specific opportunities arise regularly. Humans are fallible, even in groups. In fact, it is groupthink that creates the best opportunities.
10) The investment industry has high profit margins. This is because many investors are willing to pay an inflated price, primarily due to the human inclination toward greed. It is mathematically impossible for the industry, in aggregate, to outperform the market. Because professional investors earn good incomes, clients feel that their managers should “work hard” and “stay busy”. As a result, professional investors trade too much. This is an extremely expensive result for clients.
11) Hard work, in the traditional sense, is measured in observable activity: something gets built, something gets fixed, something gets written, something gets done. In the investment industry, the only observable activity is trading activity. However, such hard work is not productive in our industry. It is certainly not conducive to long-term perspective. In investing, thinking trumps busyness and trading activity.
12) As a group, investors are very overconfident. Good investors are still overconfident, but they are, at least occasionally, aware of it.
13) Good equity investors invest in companies, not stocks. The difference is in mindset, and it is large.
14) Most investors extrapolate recent difficulties too far into the future. And most investors extrapolate recent success too far into the future.
15) We believe in hedging against catastrophic risk when such “insurance” is available at a reasonable price.
16) Despite common belief to the contrary, studies show that stock market returns have been somewhat predictable historically. But this has been displayed only over the long term (e.g. seven-year-plus cycles) and on a real, inflation-adjusted basis. Again, we focus on the long term. And we focus on real returns.
17) We believe major turning points for asset allocation decisions are typically not difficult to identify. But even those investors who identify turning points fairly well will often be early by years. This prematurity can cause much criticism and emotional struggle. It can extend beyond the duration of clients’ patience, and this causes career risk. Investors must continuously emphasize calm, independent, and long-term thinking.
18) It can be appropriate to pass on opportunities that offer strong reward-to-risk ratios, if the magnitude of the risk is deemed too great.
19) We are leery of debt in all its forms.
20) This time is nearly never different.