Monday, January 07, 2008

Chippewa Partners Guiding Principles

The stock market is a facility for the exchange of shares. Just like markets for cell phones, oil or fur, it is driven by supply and demand. Never forget that stock prices are set “at-the-margin”, that is, by the selling pressure or buying interest at an electronic or physical location. Share prices are not set by any kind of fundamental valuation formula or by the talking heads on CNBC. Friends of our firm who work on the floor of the New York Stock Exchange understand fear and greed better than most investors but they can’t tell the difference between preferred stock and livestock. Their only concern is commission flow.

As an economist by training, I understand that contrary to what I was taught, supply and demand in the stock market is seldom in equilibrium. Price and value are separate and the market is not always efficient but it is very effective.

Securities markets are fundamental to the capital formation process in a free economy. They enable businesses to raise capital by offering shares to investors. Companies then use that capital to invest in technology, new equipment and employees that will produce goods and services to create more jobs in our communities.

Today, capitalism is the organizing principle for most of the human activity on the globe, for no one can stop capitalism. I feel the 21st century started in 1989 when the Berlin Wall came down. The opportunities for success are greater now than ever before and for the first time in the history of the world all the people who are poor, know that they are poor.

The stock market doesn’t care who you are, what color your skin is, where you went to school and it doesn’t care where you came from. Here are some reasons why the stock market will continue to go up much like it has during your lifetime.

1. America has the greatest number of entrepreneurial managed companies.
2. We have the leading military in the world.
3. We have the leading technology in the world both in hardware and software.
4. We have the leading medical technology in the world.
5. We have the leading political system in the world.
6. We have 25 times more Nobel Prize winners than any other country.
7. We create more jobs than Japan and Europe together.
8. We have 11,000 companies in the U.S. that trade under good accounting rules.
9. Americans have the freedom to accumulate wealth and extract out of life what it is they want.

The stock market is a funny place. It is the only business in the world where when things are on sale, people don’t want to buy. The greatest single enemy of long term investment success is not ignorance, it is fear. Fear leads to panic and panic breeds the inability to distinguish between temporary declines and permanent losses. When investors panic they don’t discriminate. Investors are more predicable when they’re scared and it makes it easier for those of us who take advantage of that indiscriminate selling.

All stock market declines have been temporary in my lifetime, and all advances have been permanent. The key to investment success is not found in intellectual babble such as standard deviations, quantitative analysis or chaos theory. Successful investing in the stock market is about time in the market. The single greatest thing you can have going for you is time because no on can successfully forecast interest rates over the long term and no one can forecast market gyrations. Long term the market always goes up.

Why do so many people lose in the stock market? I don’t mean to be critical, a tenant I try to live with is don’t criticize until you have walked a mile in someone’s moccasins. Investors lose because they don’t make good trading decisions, they fail because they don’t understand the market, they don’t control their risk, they don’t understand themselves, they don’t use the right tools, they get advice from brokers whose motivation is to generate commissions and they fail because they sell-out at the bottom of temporary market declines. Is it any wonder that the average American spends more time planning their vacation than they do planning for their retirement?

Another reason that investors are losing the investing game is because they have bought into what I call the Sesame Street School of selecting mutual funds. Journalists and many in the brokerage community tout the mantra of counting the number of stars in ranking mutual funds, thinking, you will enjoy superior investment results with owning so many stars next to the name of your mutual fund.

You see, unaided, most people invest through a rear-view mirror. They buy mutual funds after they’ve gone up substantially. Brokers sell investors the hottest fund, in the hottest sector, the one that has the most stars next to its listing in Money magazine. Then what happens? You know the drill. They turn cold. In fairly short order, a perfectly normal market correction comes along and the cycle comes to an end. Investing like that is like enlisting in the Taliban on September 11, 2001. On that day you are joining the proudest fighting force in the world. Yes, your outfit just pulled off one of the greatest disasters of all time. But you know what? You are toast. Your obituary is written.

When you invest like that, the chances of selling out at the very bottom of the cycle, being influenced by negative journalism is very high.

I want to make one point very clear. Pay attention. At the end of an investor’s life, less than 5% of total lifetime return will come from what the investments did versus other investments. The other 95% will come from how the investor behaved. I have a firm belief that there is no relationship between investment performance and investor performance.

Stock market success is a function of two things: first, recognition that the markets will go down and sometimes go down a lot and two: preparation to regard those declines as either non-events or buying opportunities, and never as an occasion to sell in a panic.

With all certainty, the most boring and mediocre stock fund in your portfolio, the one that you hold onto during a vicious and severe bear market is infinitely better than that world-class stock fund that you sell out of at the bottom of a temporary decline.

Now, if your serious retirement portfolio is making you feel uneasy and you feel it needs professional, unbiased attention, let’s talk for a moment on what you might do.

The first thing you should do would be to call us, the investment firm of Chippewa Partners.

The second thing would be to shut off CNBC. I hope someday CNBC will be required by law to flash on the TV screen a graphic that says “Nothing that happens in the market in the next 30 days will matter in 10 or 15 years”.

The next thing you might want to do is fire your stockbroker. Wall Street investment firms only care if they can sell stocks, not what happens to investors. They are not paid to make clients money and are not fiduciaries like Chippewa Partners. A few years ago a study was done by a firm out of Chicago. They looked at around 150 families each having at least $100 million in assets. There were some common denominators in the group, the obvious being money can’t buy happiness, the second was that they all thought they should be able to get 8% returns with no risk and they expected at least 20-25% returns!

What they did do was put a hefty premium on unbiased, objective investment advice from investment managers like Chippewa Partners. By comparison, bankers and stockbrokers were relied on by no more than 4% of the group or 6 out of 150.

If you think you are getting sound advice from a brokerage firm or worse yet, a bank, you better think long and hard. I don’t have the time to tell you horror stories. Just never forget, there is significant potential for conflicts-of-interest in commissions. If you have a question on what you are paying a broker, give us a call. We love to show prospective clients the hidden fees. A couple times a year as my schedule permitted I worked for the New York Stock Exchange and the NASD as an arbitrator. I arbitrated for investors who sued brokers and brokerage firms. It was a demanding task. I admit, the longer I was at it, the more fearful I was of Wall Street firms as well as the legions of attorneys who don’t understand securities laws.

A question that we always ask prospective clients is who is being compensated to look out for your hard-earned money? Investors that confuse a sales pitch that generates a broker’s income with impartial investment advice continually amaze me. Do you think Tiger Woods uses a stockbroker who is trained and paid to sell investments or an investment management firm that is hired to increase his net worth and protect his assets?

The answer is easy. He has competent, unbiased investment managers. He hires an investment management firm to manage his assets. And yes, you probably should too.

You also might want to stop reading the financial press. Yes, I read three papers every morning before the average guy gets out of bed, but journalism always gets it wrong. It has a relentless bias to the negative. I call it financial pornography. Reporters never report my reasons the stock market is headed up in our lifetime and it isn’t the job of journalists to make people great investors. It’s their job to make people come back for more journalism.

Recognize that what distinguishes Chippewa Partners is not only our assignment to manage investments, but an important means for allowing our valued clients to do the things that are most important to them. Like you, our plans, hopes and dreams inspire us every day and we are grateful for the opportunity to help our clients with their goals and to improve their lives.

We believe it is a privilege to work for our clients. At Chippewa Partners we are about doing the right things, the right way, for the right reasons for clients who don’t have the time, talent or training to manage a serious investment portfolio. Clients know the serious money we manage for them is serious business. Managing money for busy people with other things to think about deserves serious attention. Our expertise and track record developed over 25 years, balances financial acumen and absolute integrity with dedicated professionalism. We invite your inquiry.

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