Issue #12

After the last letter went out, we caught flak alleging we’d changed our tune (gasp! Shock!) and chosen to embrace the bull market in equities. That interpretation was not accurate. We’ve made no radical 180 degree turn. Rather, we hinted that the factors motivating our bearish stance have declined in number and degree.

The visceral reaction to our perceptible shift brings up a very important point: namely, what immutable ground shall a portfolio manager stake out, and how dare he (or dare he not?), change.

Investment decisions represent change and wealth building is a process, not a proof. Building wealth requires taking risk. As such, there are ups and downs in investing and that includes the value of a portfolio. Wealth creation is not a linear event. It is a stair step process, and sometimes the step taken is one headed the other way. Now at the risk of being labeled a disciple of Mad Money let us be clear: at Barnes Capital, when we believe that we can prudently make more money by changing our stance, we change.

On the portfolio management side, conviction levels change, and points of view change. From time to time we moderate our views on different sectors and economics on the basis of value, growth and other dynamic factors. That’s portfolio management, and the reasons for trades in your portfolio. When something really big happens, our paradigm shifts. Those don’t happen often (Summer 2002 was the last time when we decided to overweight precious metals). The point is, changing one’s point of view is part of the investing process. As Keynes stated:

“When the facts change, I change my mind. What do you do, Sir?”

Now let us take a look at some staggering data about “average investing” and how very hard it is for the average self-directed investor to bat average.

Investor Underperformance
Professional money managers go through a lot of ups and downs on the road to making consistent money for clients. And even though most professional managers fail to make the returns of the averages due to fees and errors of judgment, they do achieve risk adjusted returns that approximate their benchmark, and widely exceed the march of inflation. Ninety percent of the active managers of mutual funds fail to match the performance of their own benchmarks. But other investment strategies are worse. In 2004 investor research firm Dalbar (www.dalbarinc.com) examined the flows into and out of mutual funds for the previous 20 years and found:

“that market timers in stock mutual funds lost 3.29% per year on average”.

That statistic is deeply troubling for do-it-yourself investors who trade their accounts actively, or follow a market timing service. But many have suspected that active traders fair poorly, so the earth is in tact. However, the following Dalbar research literally knocked us out of our socks. In the same 20 year period from the early 1980s to the early 2000′s:

“Over a period when the S&P grew by 12.98%, the average investor earned only 3.51%”

The implications of this finding are horrifying: in the 20 years of mostly great bull markets, the average investor barely matched the returns of inflation. In other words, in real terms, the average investor broke even, and made zero return after adjusting for inflation. Late stage entrants in the tech-laden Nasdaq in late 1999 and early 2000 only wish that they had averaged a 3% return.

Our point is that the role of an investment advisor is to quarterback your financial house to attain the market “average”, a modest accomplishment not achieved by 90% of individual investors managing their own money.

At Barnes Capital, we build client wealth by achieving market average returns or better, with less than market risks. We keep client fees low, and adding value in a half dozen different other ways. In summary, we are differentiated from the other 400,000 other purveyors of financial services by our strategy and our exceptional service.

We will be holding some seminars on Investing this spring in Lafayette. Stay tuned for details. The next letter will highlight our investment philosophy and strategies and come out later this month.

Blessings,
Daniel Barnes, CFA

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Monday, February 12th, 2007 at 2:08 pm and is filed under Insight Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.