Key Principles and Beliefs

By: Mullins Capital Management  09-12-2011
Keywords: Investment Policy

We believe informed investors are the most successful investors. Our approach strives to illuminate the path that has been laid down through decades of academic research. We borrow from the great minds of finance to help you capture the tremendous power of the capital markets.

Markets work

Markets work, and for investment purposes, assets are fairly priced.

Though prices are not always correct, markets are so competitive that it is unlikely any single investor can routinely profit at the expense of all other investors. Research by Dr. Eugene Fama Sr. at the University of Chicago and Dr. Kenneth French at MIT strongly supports this belief.

Utilize Diversification to Reduce Risk

By simply investing in assets that do not tend to move together, you will lower your risk while increasing returns.

The world’s markets do not move in tandem. By combining asset classes with low correlation to one another in the appropriate proportions, risk can be reduced and performance can be enhanced. This observation by Harry Markowitz forms the basis for Modern Portfolio Theory and earned Markowitz the Nobel Prize in Economics in 1990.

Diversification and reliable asset class exposure determine results in a broadly diversified portfolio. In the landmark study “Determinants of Portfolio Performance,” published in the July-August 1986 issue of the Financial Analysts Journal, Gary P. Brinson, L. Randolph Hood, and Gilbert Beebower concluded that the Asset Allocation Decision (what markets to enter, which segments of the market, and in what proportion) accounts for more than 94% of the performance results investors achieve.

Attempts to either select individual securities or time market movements contributed very little to investor performance, and in most cases had a negative effect. Charles D. Ellis said it best in his classic book on Investment Policy titled Winning the Loser’s Game :

“The evidence on investment managers’ success with market timing is impressive – and overwhelmingly negative.”

Invest for the long-term

“He who wishes to be rich in a day will be hanged in a year.”
– Leonardo da Vinci.

We believe that investment success should be measured in years, not months or days.

Ignore market “noise”

The vast majority of Wall Street and the financial media only excite and confuse investors. Neither is interested in informing and educating investors.

  • Wall Street/Bay Street brokerage firms want investors to keep buying expensive and profitable in-house products.
  • The media is out to sell magazines, newspapers, or airtime.

Investment markets are not that complicated. We can break it down into two major statements of belief:

  • You believe in the ability to select superior investments or you don’t.
  • You believe in the ability to time the markets or you don’t.
Use tax efficient strategies

“Taxes are the single largest expense investors’ face.”

Taxes swamp any other cost related to the management of your taxable assets.

A tax efficient strategy will maximize your net return after taxes, which is the measure that really counts.

Employ Asset Class Investing

Four attributes of institutional asset class funds that are attractive to you as an investor are:

  1. Lower operating expenses
  2. Lower turnover resulting in lower costs
  3. Lower turnover resulting in lower taxes
  4. Consistently maintained market segments
Global Diversification Reduces Risk

Technology is creating a new paradigm in which businesses around the world are tied together, just as markets are now tied together.

It is a useful feature of global markets that individual stocks around the world with similar risk have the same expected return, especially when you consider that North American Markets and International markets do not move together.

This non-correlation reduces risk to properly diversified portfolios.

Final thoughts

Our investment philosophy is provisional. Our mandate is to adopt better approaches as they make themselves available and discard those investment theories that do not survive the test of time.

Keywords: Investment Policy

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