Investment Policy Statement

This is the usual question and answer format and it should provide, with careful reading, a complete and detailed description of every aspect of the management of your portfolio. Any comments and suggestions are, as always, welcome.

I don’t want to read everything. What is most important?

Although I do encourage you to read most of the contents of this package the following are worthy of concentration:

  • Since inception (1981), have we met our long term targets for the entire portfolio with limited volatility

YES. See page two of our annual performance report and the chart appended to the performance report (enclosed). The long term target is an annualized return of 5% PLUS the annual rate of inflation.

  • Have we met our long-term targets for you?

In nearly every case this would also be a YES and it would be shown on the chart attached to the back of this investment policy statement (IPS).

This would be indicated by the blue performance line being above, or equal to, the pink target line. We append this chart when a client relationship has exceeded five+ years. In the cases where targets are above performance, the differences are minor unless there are extenuating circumstances and we address this in your individual IPS.

It has been harder to meet the targets for newer clients (last six years) as we have been battling a difficult market, including the debacle of 2007-2008, but, in every case, our performance is wildly favorable when compared with the major indices, which are still only barely above, in real terms, the levels first reached 13 years ago. As time passes, we expect that our newer clients will also find that their performance equals or exceeds our targets.

In the case of younger clients, who are in the accumulation phase, we just use the actual performance (which has been excellent) and we introduce the target line when they get closer to retirement.

  • How are we doing overall ?

In the vast majority of cases, we are meeting our long-term targets and you, in your turn, are meeting your goals of adding funds (if in the accumulation stage) or withdrawing funds (distribution phase) at appropriate levels. In these cases everything is proceeding as planned to meet your goals.

You can, comfortably, ignore the chaos and turbulence in the world and worry about the important things – family, friends and the pursuit of knowledge and happiness.

In a small minority of cases, we do have concerns (usually based on a pattern of unsustainable withdrawals) and these are addressed regularly in the summary on page two of your IPS and in your annual financial planning statement.

In summary, everything is fine, relax and try to have a longer rather than a shorter term focus. The markets WILL fluctuate and, generally, the fluctuations are where we do some of our best work.  Our goal is, as has always been true, to get you to your goals with the minimum of volatility and risk. J. 

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.

Can you give me the highlights of this report and explain the key attachments?

There are a number of personalized attachments.

  1. As described on the previous pages, we have enclosed a chart of your individual performance (for clients who have been with us for at least five+ years). In virtually every case, the actual results exceed our target and this has been true, importantly, for most of the life of the portfolio. The target level is critical to your financial planning summary and is key to our long-term planning. It is significant that the portfolio has exceeded our target over the entire length of the portfolio (33 years) and it gives us a reasonable expectation about a positive outcome in the years ahead. Not in any given year, of course, but over the longer run. It obviously isn’t something we can guarantee, but it should be an encouragement as we look ahead. Our basic value orientation has not, and will not, change.
  1. We have also attached a printout of your portfolio balances on January 1st and December 31st of 2013.
  1. The remaining personalized attachment is an individual report that lists the history of your portfolio since inception. It records the changes in two year groupings. The column for investment earnings reflects the net total effect of our investment activities during the year.The client savings column represents the net total of your deposits and withdrawals during the year. A negative total is in parentheses.
  1. The annual report for the portfolio (previously emailed) is also enclosed in hard copy. Because of issues with a number of large fund and company distributions the amounts came in late and after year end (as of today we are still receiving them). We made a decision to treat them as income in 2014 rather than 2013 which will have the effect of lowering 2013 income by 0.6% and increasing 2014 income by a similar amount.  This change is reflected in your individual statements dated December 31st (see attached).We did this so we could get the IPS out to you in a timely fashion. It will have zero effect on your net income.

The material on pages 1-5 is sufficient for a useful overview of our activities. The material that follows is more detailed.

Additionally I suggest that you read the “Summary and Conclusions” at the end of this report.

Is there a large variation in client portfolio returns this year?   

In 2010 we finally negotiated an end to the penalty on trading for smaller clients and now, in that respect, we are all on a level playing field. Variations around the overall return will persist, of course, because of differences in risk tolerances, near term goals and because some clients have unusually large concentrations of funds in retirement plans with limited, and frequently poor, investment options.

We expect, through time, that clients with similar goals and similar circumstances will have approximately equal returns. The bulk of our clients are risk averse.

The majority of our clients experienced a year with returns +/- 1% of the overall portfolio return.

You describe your approach as conservative. Can you elaborate why and how it is conservative?

We take a conservative approach in managing your assets, but also in how we suggest that you structure your entire financial life. Let me illustrate by providing for you, in aggregate, the complete financial statements of all of our clients.

Our clients had the following balance sheets in 2003-2013:

                                                                    2003                            2006              

Assets under management                   $ 68.2 million            $ 91.2 million      

Real estate owned                                  $ 37.8 million            $ 50.6 million      

     Other assets                                       $  13.4 million            $  17.2 million       

     Gross worth                                       $119.4 million            $159.0 million    

     – All debt                                             $   7.2 million            $    9.0 million     

NET WORTH                                          $112.2 million           $150.0 million    


                                                                  2009                            2013

Assets under management                   $135.0 million            $180.5 million        

     Real estate owned                              $ 63.8 million             $ 65.7 million        

     Other assets                                        $   11.8 million              $  10.4 million         

     Gross worth                                        $210.6 million            $256.6 million     

     – All debt                                              $  11.8 million             $  14.6 million      

NET WORTH                                           $198.8 million            $242.0 million   

The overall and the individual balance sheets are extremely conservative with debt that is both minimal, as a percentage of net worth, and also predominately low cost (3.2%) and all fixed rate (usually 15 year) (Most mortgages were refinanced at extraordinary low rates in the last 18 months). 

The figure for debt as a percentage of gross worth is extraordinarily low at 6.0%  and this is part of our overall approach where we emphasize balance sheets that are structured to withstand the worst of times. I abhor leverage as debts have a very nasty way of coming back to bite the borrower.

The strength of our balance sheets and our conservative approach to investment have helped immeasurably in 2000-13 and they will be invaluable in the years ahead  if, as seems likely, we are faced with continuing challenges.

The balance sheets are fortresses of strength. Real estate is no longer a drag on net worth and has been a net positive in the last two years. The vast majority of our position in real estate is, of course, your primary dwelling, so in many ways it isn’t of particular concern as you don’t intend to move and, in any event, you will continue to require shelter.

What rates of return can we expect in the years ahead?

We can, as stated before, make no promises apart from our basic promises:

  1. To invest all of our own assets in exactly the same way as the portfolio, i.e. “We eat our own cooking”
  2. To have no conflicts of interest. To always act on your behalf.
  3. To invest following our basic and conservative value methodology.

We do however know how the portfolio has performed over the last 33 years and the performance has been encouraging.

I used the same Ibbotson data as I utilized last year as the changes are inconsequential because it is a very long time series.

In the 82 years (1928-2010) the following major asset classes have achieved annualized returns (approximations) as follows (Ibbotson data).

Common stocks (S&P 500)


Long Term Bonds


Money Market Investments




Although we have only been managing the portfolio for the past 33 years (and the data covers the past 82 years) the fact that we have outperformed the riskiest, and best performing, asset class (stocks) with a fraction of the volatility is  encouraging.

The fact that we have just endured the worst decade in market history (since 1820 by some measures) and have continued to grow and meet our targets should also be encouraging.

What factors do you consider in allocating assets inside the portfolio?

The historical record of the performance of different allocations is important and forms the basis for how we organize your portfolio in the long run. We look at this in the context of the factors listed below:

  1. Your ability to tolerate declines in the value of the portfolio, i.e. your attitude towards all of the different kinds of risk. We only focus on one type of risk (the absolute risk of losing money) but we also realize that many of our clients are affected adversely by volatility in the portfolio so we also manage the portfolio, in most cases, to minimize that type of risk without giving up too much in the way of potential returns.
  2. Your goals.
  3. Your age.
  4. Your need for cash in the medium-term and your tax status. We carefully allocate your funds via pension funding and other measures to maximize your long-term after-tax returns. Your current and future marginal tax rates are vital ingredients in our decision process.
  5. The current valuations in the marketplaces versus their historical ranges to measure areas that are more, or less, dangerous based on all historical precedence i.e. what, if anything, is cheap in absolute terms.
  6. Your responses to our risk questionnaires.

What are the protocols for day to day management of the portfolio? Are there ANY conflicts of interest?

  The answer to the second question is easy. No. We always act on your behalf and in your best interests.

On any given day, I make numerous “block” trades in individual securities and the blocks are allocated at the end of the day by Sheila Phillips, based on the needs of individual clients using our proprietary software. I never influence the daily allocation of securities and this arrangement of a separation between the trading and allocation functions fully meet the wishes and requirements of our regulators (The Securities and Exchange Commission).

In securities trading, as in all other areas, we always utilize or recommend the best combination of low cost provider and superior execution and service. We continue to pressure Fidelity on issues regarding costs and services, although it seems rather unlikely that we will be able to reduce commissions any further.

How does the investment policy statement relate to the financial planning statement?

In the summary of the financial planning statement, we discuss the attainment of your stated goals, perhaps the most important part of the whole management process.  The goals involved have all kinds of time frames ranging from the very short to the long term that is, in nearly every case, at least 10 years in length.

Our median clients have a joint life expectancy of 30+ years.  It is because we are working with lengthy periods of time that we pay so much attention to the long-term historical patterns of investment returns (see the section above on the long-term Ibbotson data). The averages are important and, indeed, form a critical part of our projections, but equally important is the variability in those returns. I am not going to go into the latter aspect in great detail here, but it is something that we pay particular attention to and it is important. (The field of study that is relevant here is Monte Carlo simulation theory.)

The key point is that it isn’t just the average return over a period that is critical but, more importantly, it is the timing of the individual returns and, particularly, the importance of avoiding very sharp declines at key points in the process e.g. the debacle for many folks in 2000-2 and 2008.  This didn’t seem a very important point for many participants until recently when they discovered the devastating effect of having very significant declines and the effects that had on their imminent retirement, etc.

The goals that we have are simple. We establish viable long-term goals for the portfolio based on a reasonable and conservative appraisal of the long-term record and we attempt to attain those goals with the minimum amount of volatility. We cannot avoid volatility, and your portfolio will fluctuate, but we do manage the portfolio in a very conservative manner and this tends to significantly mute volatility.


The summary in the financial planning statement is built around the belief and expectation that the portfolio will meet the target goals in the long run and that the individual portfolio is structured to meet the cash flow needs of shorter and medium term goals. We believe that it provides a solid and realistic way to view the future and that the projections we make regarding longer term goals are reasonable and conservative.

My part in the process is to offer a steady hand at the helm, to apply consistent principles to the management of the portfolio and to communicate our progress to you so that you completely understand the process and our ongoing activities.

Investment professionals are supposed to exercise independent judgment; in Warren Buffett’s words they are supposed to be fearful when others are greedy and be greedy only when others are fearful. It rarely seems, in reality, to work that way as the data suggests that advisors, in the aggregate, have been buying high and selling lower.

The data from advisors who use TD Ameritrade and Charles Schwab (a reasonable cross section of advisors) showed that they had 74% of their assets in risky investments in October of 2007 when the Dow Jones hit its all time high of 14165. In March of 2009, when the market bottomed at 6440 the money invested in risky assets had sunk to 49%. Industry observers are puzzled by this behavior by supposedly professional investors who should, after all, know better. There are several explanations and the reality may be a combination of all of them. One is that clients may be consciously, or unconsciously, influencing advisors to be more conventional and trend following. Another is that many advisors, in fact, are as influenced by mass emotion as their clients. The third reason, and perhaps the most disturbing, is that an MIT study found that advisors tended to mirror their clients predispositions – to quote “One danger is that if you voice a strong opinion, your adviser might not give you a second opinion. He might merely echo your own, making you think he is smart because he agrees with you—and clearing the path of least resistance to his next commission. Sometimes, acting like a sheep just pays better”. Sad, but true.

I, on the other hand, will not hesitate to give you a negative opinion if I believe it is justified by a reasonable analysis of the facts. As I have mentioned a number of times before I would rather lose half my clients than half my clients’ money.

We never, ever, have an opinion on client goals (unless they are illegal) and it is our responsibility to advise you on the best approach to achieving your goals. It is also our responsibility to advise you how your actions affect all of your goals and to help you triage between different goals.

We do, however, have strong opinions about investments and we are extraordinarily independent in our investment process. You can be certain that we will offer our professional, impartial opinion on any investment decision either inside the portfolio (where we have complete discretion) or in other areas where we always like to voice an opinion. In many ways we feel that the projects that we have helped prevent, or encourage, have been as beneficial to our clients as our routine portfolio management.

We hope that we can continue to serve you far into the future and that our partnership will be as successful in the future as it has been over the life of the portfolio. I suspect that the next 33 years, based on the accelerating pace of change, will be particularly challenging. I look forward to the challenge. J Please call if you have any questions or concerns. We are always available and are happy to talk, answer questions and, hopefully, to provide useful advice and answers.

Last year I wrote the following :-

What scares me most in 2013?

  • The enormous flood of money into bonds in a frantic search for yield. This will NOT end well and probably will be the next big debacle. It was an unpleasant year for fixed interest investments.
  • Politicians. No comment needed :) .

What encourages me most in 2013?

  • Some decent valuations in the equity market. They rose sharply through fair valuations to overvaluation.
  • The USA is in much better shape than everyone realizes in absolute terms and definitely better than most of the world in relative terms.  I still believe this is economic terms but not in terms of market valuations.   

What concerns me most in 2014?

  • Overvaluations in most markets. I intend to tread VERY carefully.
  • Politicians.
  • Growing income (and wealth) imbalances in the USA and, to a lesser extent, abroad.

What encourages me most in 2014?

  • A few, a very few, neglected and unpopular areas.
  • A generally benign economic environment.

Happy New Year from all of us


Mike, Nancy and Sheila