Once we define this “speed” we can define the degree of risk we must take and begin the task of controlling risk. Keep in mind, that there are risks in going too slow and in going too fast. There are two aspects to our methodology in this area.

(a) Diversification

Diversification is the most important tool we have to control risk. Many investment advisors believe that diversification is achieved when you own ten different US common stocks. We disagree. If the ultimate goal of diversification is to reduce volatility, we must own different “classes” of investments whose prices do not move concurrently in the same direction. We, therefore, select investments from a total of seven different assets “classes”.

• Domestic common stocks (including Mutual Funds)
• Bonds and bond funds
• International stock mutual funds
• Commodities
• Gold investments
• Real estate trusts
• Natural resource investments
• Cash or cash equivalents

(b) Discipline

In my experience the emotions of hope, fear and greed account for ninety percent of all investment mistakes—both on the buy and sell sides of the decision-making process.  Eliminating these emotions (or at least reducing their impact) is a key ingredient in controlling and managing risk. We therefore use an “emotionless” mathematical discipline in our decision making process. We employ two different levels of investment discipline. The first dictates the investment “classes” we will use at any given time, and the second determines which investments we will own within these classes:

1.  We never own an investment in any asset class that is not in a primary price uptrend.
2.  We never buy an investment in a given asset class unless it is performing at least as well as the overall index  of the asset class itself.

Once we decide to make purchases in any asset class, we have to spend some time selecting the most appropriate vehicles inside this class. Here is where the process becomes more of an art than a science. Obviously, price-performance is a consideration in the investment selection process. It’s better if the price of the individual investor has been going up rather than down. Another way of saying this is that we concentrate on opportunities rather than problems. In my experience, the best way to lose money in the stock market is to purchase an investment that is a primary price downward. We also rely heavily on other criteria such as:

• Historical volatility
• Economic & industry trends
• Consistency of performance
• Relative value
• Financial stability & predictability

In selecting individual investments we also have to keep in mind that some will be suitable for clients with high investment return expectations, and others will be suitable only for very conservative clients. After all, there is a huge difference between Intel and PMC Sierra.

I’ve been managing money for clients for over twenty-five years and I’m pleased to say that most of these clients have been very satisfied with my philosophy, methodology, and performance. Of course, it’s a performance that counts but without a sound philosophy and a method for implementing that philosophy, performance will be like the weather—or worse, the lottery. Many clients have asked me “How do you do it?”  It’s relatively easy to explain my philosophy and methodologies, but it’s more difficult to explain the role of experience and knowledge. I guess it’s like asking a doctor to explain his education and his 20 years of experience to you in an hour. It just cannot be done. I can, however, share some important lessons I’ve learned:

• Skepticism and a willingness to be a contrarian are virtues
• Consistency and predictability of performance by a company, a person, or a fund
  are the most important criteria in investment selection
• Capital markets move in relatively long-term cycles which are difficult to predict
  accurately but can be recognized in an early stage by disciplined, trend-following techniques.
• The actual act of purchasing an investment can be done by a seven-year-old child.
  Determining when to buy or sell it, is an art form that must be learned at the school of hard knocks.
• The financial media are a major enemy of the individual investor. The media (print and electronic)
  know that the emotions of hope, fear, and greed motivate people. The media deliberately appeal to
  these emotions to increase their ratings or circulation.
• The most challenging aspect of our jobs is that we keep up to date on our clients’ objectives. We know
  we have a moving target.  This is why we need continual personal contact with clients to make sure that
  what we are doing makes sense in light of their changing objectives.

There are very few “absolute truths” in the financial planning profession but here is one of them:

“When it comes to financial advice there are no experts—just varying levels of ignorance.”