"The important thing about a philosophy is that you have one you can stick with." David Booth, founder and chairman of Dimensional Fund Advisors (DFA).
Prior to founding this firm in 2003 after the tech bubble crash, I spent many years researching how best to provide investment advice. How would we be different? How could we provide a better experience for our future clients than they were experiencing with their existing financial advisors or by investing on their own.
I read extensively. I went to conferences. I read more. And more. I attended my second AICPA Personal Financial Planning conference, in Philadelphia. I went from exhibitor to exhibitor and talked to many firms. And then, it happened. I got the book that would change my business life and the lives of my clients. It was my "aha" moment.
On the Friday afternoon train ride after the conference ended, I started reading "The Only Guide to a Winning Investment Strategy You'll Ever Need," by Larry Swedroe of The BAMAlliance . I could not put it down. I didn't want to put it down. And I didn't. I read it that night and throughout the weekend. I had found an investment philosophy that we could stick to. Over a decade later, I believe in it more every day.
Most people view investing and the stock market in some form of trying to make accurate predictions or forecasts. They think:
- Is Ford a good buy now? Great, then I'll buy it. But what if it isn't a good time? How do you know?
- Is it safe to invest now, since the economy seems to be recovering? Great, in which case I'm going to move $XXX,XXX from cash into stocks. But what if the market has already made a big move? How do you know the right time?
- A few years ago everyone thought Apple was a great company and could do no wrong. The stock price was soaring. Onwards to $700 per share, until suddenly things changed and now it trades in the $400s. How? Shouldn't someone have been able to predict this?
We take a different approach. One that is rational, understandable, consistent and provides our clients with peace of mind.
• We do not have a crystal ball. We don't make forecasts and readily accept that we cannot see the future (just like Warren Buffet). Doesn't this make sense?
• We don't believe that active mutual fund managers can consistently beat their respective benchmarks over a long term period. And even if they could, can they be identified well in advance, and consistently? We don't think so.
• We believe in using mutual funds with very low costs. Focus on what you can control.
• We believe in holding mutual funds that each own a group of stocks (say US small value or International Value) that most of the time will outperform actively managed mutual funds (where the manager is trying to predict which are the best stocks to own). And we have tons of academic data to support this.
• We spend a lot of time talking with our clients. We educate our clients about our philosophy. We want them to be prepared for bad markets, as they occur every 3-5 years, on average.
• We emphasize international investments and owning small company and value company stocks. Why? Because they provide better diversification and greater expected (and historical) returns than just owning US large company stocks (which is what most people own). And we have lots of data to support this too.
Having a philosophy that we believe in passionately enables us to provide our clients with a better investment experience. It enables us, and them, to be more disciplined and adhere to their financial plan. We are fee- only financial advisors. This enables us to be independent and always act in our clients' best interest.
There is much more to our philosophy, but I will save that for future blog posts or personal conversations.
And even though we are responsible for millions of dollars of our clients' money, because we have a solid philosophy we believe in and stick to, we also sleep well at night. And that is comforting also.
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