NorthBay biz plays catch up with investment advisers who were interviewed about the state of their industry four years ago. Have things changed since 2005?
Exactly four years ago, in the November 2005 issue, NorthBay biz published an article called “My System,” explaining how local investment advisers choose stocks for their clients’ portfolios. The methods varied greatly, encompassing everything from pure data analysis to determine the stock value, to qualitative research into the company the stock represents, to incorporating macro-economic analyses—looking at the market at large, which sectors are in the upswing, and which industries are on the decline. Some combined approaches or used a totally different, proprietary method. The investment advisers’ companies, while all located in the North Bay, ranged in size from sole proprietors that handle a minimum investment of $30,000 to larger companies that require a $2 million initial investment.
Given the enormity of changes in the investment industry over this four-year time period, we decided to go back to some of these advisers and find out if their previous recommendations still stand, how they’re advising clients today and, bottom line, what the recent changes mean to the current investor—both those new to the marketplace as well as those nearing or well into retirement.
John Baxter
nancial Services was created in 2003. Baxter aims to share his expertise and experience in financial planning and investments with others in similar circumstances. That is, those preparing to retire or already retired.
“After I learn enough about a client’s financial circumstances and preferences, I look for undervalued stocks in industries likely to benefit from the economic environment I project over the next several years,” explains Baxter. “I then present these possibilities to clients so they can select what makes the most sense.”
While Baxter’s overall approach hasn’t changed—he looks for stocks whose projected earnings or current tangible book values seem high relative to the prices of their shares in the market—he’s nevertheless putting more emphasis on outside factors affecting an industry or company. In the past, he always considered the company’s industry in the context of the ever-changing national and world economies, its strengths and weaknesses relative to its competitors, the track record and staying power of its management team and the reliability of its financial statements. Yet as we’ve seen over the past four years, those macro-economic changes can exert more power than previously thought.
The biggest change he’s witnessed over the last few years has been the way investors and their advisers consider stocks.
Howard Aschwald
“We use fundamental research to select stocks based upon our determination of intrinsic value,” explains Aschwald. “We buy stocks at a discount to their intrinsic value and sell them whe n they become no more than 25 percent overvalued. Based upon our economic outlook, we will overweight or underweight specific economic sectors by up to 4 percent—technology or consumer discretionary, for example. Why? Because we believe long-term success comes from controlling unnecessary risk as much as it does from picking good stocks.”
Peter Eliades
Peter Eliades is a Harvard graduate with a law degree from Boston University and has been an active stock market watcher and participant since the early 1970s. He’s made frequent appearances on national television such as CNBC, “Wall Street Week,” “Nightly Business Report” and “Larry King Live.” He’s also written articles for Barron’s magazine, including a 1999 article which forecast that the Dow would have problems getting convincingly above 10,000 over the following decade. Since 1975, he’s published a stock market newsletter called Peter Eliades’ Stockmarket Cycles.
Eliades started implementing his seasonality model, or system, in February 2005, after watching the consistent results of a similar program over many years by newsletter-writing colleague, Norman Fosback.
The seasonality system is a unique investment approach, grounded in three-quarter s of a century of market testing, including almost five years of real-time performance. Its proven track record of superior reward versus risk makes it particularly appealing for long-term investment portfolios, especially tax-deferred retirement accounts. This investment system exposes participants to the risk of marke t fluctuations less than a third of the time, and less market exposure means less risk. If there was any time to really put this model to the test, the last few years would be it. So how did it measure up?
“Theta Investment Research shows us as being in the 97th percentile of the more than 400 portfolios it looks at for 48-month performance,” says Eliades. “We’re in the top 3 percent of all portfolios managed, and we’re in the top 4 percent of risk. So in other words, as good as our performance is, our risk is still better. That’s the strength of the system. We’re out of the market 70 percent of the time or more. It’s been more because of our filter. We’ve been out overall about 75 percent of the time [since September 2008]. And obviously, when you’re out of the market, there’s no risk at all if you’re in money market funds where we are when we’re out of the market. So we just get into the market for a short number of days on a regular basis based on my market data research covering the last years or so. When we’re in there the market tends to go up more than it does at other times. I think we’ve proven that performance-wise.”
Given Eliades’ substantial success when most investors were losing large sums of money, has anything changed in his business over the past four years?
“The one thing that’s been changed—and there was no reason to talk about it before, because it hadn’t been implemented—is the use of a filter that prevents our usual trades when the market goes below a certain level,” says Eliades. “That’s not really a change in the program. It just filters out trades that historically have proven to be higher risk. So I try to filter out higher-risk trades based on where the market is, and the model has been very effective doing that.”
The first time Eliades had to implement this filter was in September 2008. He’s just seeing it start to rise above the filter line, although it’s not yet at a “convincing” level. However, signs are pointing in the right direction for Eliades to enter the market again soon.
Gregory Friedman
What approach does this mover and shaker take when advising clients?
“We don’t pick stocks,” explains Friedman. “We use institutionally managed mutual funds and separate accounts to construct broadly diversified portfolios among multiple asset classes. We do extensive research and monitoring of macro-economic conditions and also do relative valuation analysis among asset classes and at the asset class level—not the individual stock holding level.”
In many ways, Friedman believes the changes of the past several years have validated the advantages of multiple asset class investing. However, the firm is increasing its exposure to fixed income and is also increasing its use of low- and noncorrelated asset classes.
“One of the biggest changes in the industry [I’ve seen in the last few years] is the increased challenges of modern portfolio theory,” says Friedman, “which forms the basis for how institutions and sophisticated investors manage money prudently.”
Modern portfolio theory proposes how rational investors will use diversification to optimize their portfolios and how a risky asset should be priced. The model assumes investors are risk-averse, meaning that given two assets offering the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher returns must accept more risk. The exact trade-off will differ by investor based on individual risk aversion characteristics. The implication is that a rational investor won’t invest in a portfolio if a second portfolio exists with a more favorable risk return profile—in other words, if (for that level of risk) an alternative portfolio exists that has better expected returns.
“My biggest challenge today is to keep clients focused on their long-term financial objectives and overall financial situation instead of getting engrossed in the daily barrage of bad news,” says Friedman.
So what does he tell investors?
“Turn off the TV!” says Friedman. “Maintain a discipline of having confidence in your strategy and don’t get distracted and panic.”
The last four years have shown us there’s no such thing as a surefire investment, and that even the best investment advisers don’t necessarily have all the answers. But what we can count on is for many of our local investment counselors to keep their clients’ best interests at heart and do what they can to secure our futures—both short- and long-term. That’s a system that will never become obsolete.
Investing in Community
“Valley Oak Wealth Management was pleased to host this important educational event at [Homeward Bound’s] Next Key Center as a way to give back to our local community and support those who help the less fortunate,” says Tim Russell, managing partner at the firm.
“We have such great clients—a great many of whom are women—and we’d like to thank them for participating in this annual event,” Russell continues. “We believe strongly that educating our clients is important. It’s just an added bonus to contribute to a very worthwhile organization at the same time.”
Homeward Bound (www.hbofm.org) provides shelter and services for homeless families, including counseling, classes in financial literacy and other life skills, job training at Fresh Starts Culinary Academy and more, in an effort to transition them out of homelessness.
“We’re thrilled that Valley Oak Wealth Management has chosen to support our community nonprofit organization in so many ways,” says Paul Fordham, development director at Homeward Bound of Marin. “By renting our beautiful conference facility for its events and by purchasing our locally made Halo Truffles as gifts for its guests, the company has demonstrated that everyday business transactions can support people in need.”
Valley Oak also offers quarterly client education and appreciation events, CPA training lunches and public financial workshops. You can visit its website at www.valleyoakwm.com for more information.
