Process Over Outcome part II
DIS and DAT-Process Over Outcome part II-Spring, April 2014
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
“We’re not going to talk about what we’re going to accomplish; we’re going to talk about how we’re going to do it.” Nick Saban
Clients and potential clients often ask questions such as, “How often will you monitor my account?” and “How do I know if you are watching this investment?”
In this edition of DIS and DAT we will attempt to answer those questions as well as give our clients insight into our current investment process. More than likely, we have discussed it with you in bits and pieces at your review meetings, often in response to certain questions, but this will be our attempt at consolidating that into one clarified response.
To make this discussion easy to follow, we have divided it into six parts. First, we’ll begin with a discussion on the initial investment meeting, followed by an explanation of the research we do. Then we share with you how we trade and monitor positions. We will then turn our attention to communications regarding investments, including the individual client review as well as mass communication.
Initial Client Investment Strategy Meeting
“one for the money, two for the show, three to get ready and go cat go” Blue Suede Shoes, Elvis Presly hit
Prior to beginning to invest, an advisor sits down with the client to share information and set portfolio guidelines. The meeting begins with taking a look at the portfolio allocation prior to investing. A description of our investment strategy referred to as, Diversified Investment Strategies, is then presented to the client. The description includes a discussion on risks, philosophy, and tools used. The focus of the meeting then moves to a description of how the strategy is implemented. One part of this section lets clients know that the search for value takes precedence over hitting target allocations quickly. The reason for managing portfolios in this way is so that each client receives a portfolio of value. Investing it all at once leads to a client’s portfolio performance being based on the randomness of when they began and stopped investing. In our view this function is a drawback of pooled money, where a client’s results are based less on the skill of the manager and more on the timing of the clients’ actions. A client beginning in February 2009, after the Dow Jones has dropped in half is facing a very different environment then a client five years later, once the market has recovered to an all-time high. Next the client chooses their personal target allocations after a discussion on short- term needs, mid-term needs, and investment needs takes place. If any reasonable restrictions are to be placed on account management they are initially set at this time. Near the end of the meeting clients choose their preferred meeting review frequency in order to monitor the accounts. The first review meeting is then schedule in advance and the client receives a reminder card.
“A man only learns in two ways, one by reading, and the other by association with smarter people.” Will Rogers
Reading, reading, reading….. The process of generating ideas for investment management begins and ends with reading. Here is a list of various subscriptions, and websites that are reviewed for investing ideas…
sinletter.com,incomesecurites newsletter, and gemfinder newsletter,investors business daily,
In addition to the reading, spreadsheets are maintained based on tested concepts. Asset classes are analyzed in a spreadsheet referred to as “contrarian model” internally. For fundamental valuation, a spreadsheet is maintained with calculations and updated numbers. Screens, based on selected investment criteria, are set up in the various programs to quickly search for ideas.
CNBC is on as well as real time feeds for news. Current and watch positions are entered into the various software so that real time information is available, including share price, charts, and daily performance.
“Trading is very competitive and you have to be able to handle getting your butt kicked.” Paul Tudor Jones
The target allocations, chosen by clients in the initial client investment meeting, are entered into the portfolio management system. Each morning reports are run indicating where each portfolio stands in relation to the amount available for investment. The analyst and portfolio manager review possible investments for buys as well as monitor current positions for buy and sell opportunities. For purposes of description, the investment strategies can be divided into three general, non-binding categories:
1. Timed event – this is when a known future event is likely to provide liquidity. Examples include merger arbitrage and deep covered call writing.
2. Non-specific timed event – this is where liquidation of some type is expected but the timing is
currently unknown, yet we believe would be above the current price if it occurred in the not too
distant future (maybe three to seven years). Examples include closed-end funds at wide discounts
to the net asset value, common stocks/bonds below book value with positive cash flow, and
common stocks below networking capital.
3. Non-event driven – this is an open ended category in which we are searching for long term (more than 5 years) value in stocks of companies that are
a. generally out of favor and we believe the company has a competitive advantage
which may allow profits to grow; or
b. specifically out of favor with reasonable or no debts, high historical profitability
and in need of some type of transition.
The average focus is around the five year holding mark for inclusion in our investment allocation. The portfolio manager will make the decision on which positions to trade, as well as the size allocation, and when. Combinations of technical factors are analyzed for entry and exit, AFTER deciding on fundamental value and contrarian opinion. The trader then takes this guidance and attempts to fill those instructions at the best possible prices. The trades are then reconciled and sent off to the custodian for allocation. The portfolio manager reviews and initials the trade reports.
“Twice and thrice over, as they say, good is it to repeat and review what is good.” Plato
In considering internal monitoring there are two distinctions. One is portfolio specific and the other is position specific.
The day begins by generating a report showing the difference in the target investment allocation and the actual investment allocation per account. The objectives of moving towards those targets are accomplished by monitoring individual positions for buy and sell opportunities. Monthly reviews of the performance of each account are done with comparisons against the sp500 for reference. These reviews account for time frames consisting of monthly, year to date, 12 months, 36 months typically. Also included are monthly reviews of the aggregate of accounts to monitor overall decision making relative to market performance. On an unsystematic basis accounts are pulled based on certain positions and other criteria to review individually. Also unsystematically account allocations are reviewed randomly for position performance and overall performance. The purpose for the unsystematically review is it keeps one from wanting to “fill” the targets to be able to check the task “done”. It does not seem that should be the reasoning for selecting positions for buy and sell.
At the investment or position level, portfolio managers and analyst are reviewing price quotes, charts, and news throughout the day. Quarterly and annual reports are read on the companies owned, as well as news releases, when they occur. New reports issued by the newsletters are read as well. All this daily review can lead to a loss of the big picture, therefore, monthly updates of the internal asset class model, and various screens are conducted. On a quarterly basis there is a more thorough gathering of information intended to get back to a long term view.
“Feedback is the breakfast of champions” Ken Blanchard
The client reviews are designed to provide feedback to the client, intake feedback from the client, discuss recent past changes, and consider possible future changes. Reviews are prepared internally by updating client information and looking back at the last review. The advisor begins the review with some housekeeping items such as any changes in telephone, mailing address, email address. The date, time, and frequency of the next meeting are then agreed upon. An inquiry into whether or not a change of beneficiaries is necessary is next, followed by an inquiry about any recent health issues. A review of estimated tax payments is discussed in the next session as well as questions regarding changes that are expected to taxes in the upcoming year. Social security is the next on the list to see if any changes occurred, or if there are any questions concerning the benefits. Prior to turning attention toward investments, the advisor asks about any changes the client has made to their estate planning. We are not attorneys, but we are often contacted upon death of a client and would like to be able to pass this information along and help in any way possible.
The investment portion of the review is designed to answer if the client wants to make any changes in their target allocations toward short term, midterm, and eligible investments. A review of the withdrawal rate and any anticipated withdrawal changes are discussed. Then, any investment restrictions placed on the account are discussed. Other notes and actions are made as well. From there a consolidated performance of all of the clients’ accounts, for the last calendar year and year to date time frame are reviewed. A review of the current consolidated allocation is also supplied. Each account is then broken down, and the current target allocations, as well as current weighting to show the difference from target and actual allocations are reviewed. Additional information is reviewed in order to be reminded of the longer term and where the portfolios have been. First is a graph and table showing at each month’s end, the net cumulative investment into the account, the portfolio balance of the account, the contributions and withdrawals, and the net investment gain in dollar term from inception. The investment portion of the review is concluded by breaking down the consolidated portfolio in terms of money market, fixed maturity, investments, and other client selected positions. The performance of each of these categories is reported over the year to date, the past twelve months, past thirty six months, past sixty months, and inception. After that review, the client answers whether any change in target allocation is necessary.
“The single biggest problem in communication is the illusion that it has taken place.” George Bernard Shaw
On a quarterly schedule this communication called “Dis and Dat” is shared via email, website, app, and regular mail. As of last quarter some of our internal analysis titled “Dis and Dat Market Analysis” went out via the same channels. In the near future we are hoping to share a quarterly video titled something like “Bayou Side Chat” through the app, email and website. Hopefully we will be able to step outside of the analysis portion of our brains and have some fun with that.
See you next time.
Please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Diversified Investment Strategies, LLC DBA Advisor.Investments to effect any specific transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Diversified Investment Strategies, LLC dba Advisor.Investments), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC dba Advisor.Investments. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Diversified Investment Strategies, LLC DBA Advisor.Investments is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Diversified Investment Strategies, LLC dba Advisor. Investments client, please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Diversified Investment Strategies, LLC dba Advisor.Investments current written disclosure statement discussing our advisory services and fees is available upon request.
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