By Daniel A Barnes

Faith and Reason are each essential components in parenting and investment decision-making.

Theologians and philosophers have debated the role of each in justifying man’s existence and the existence of God or the necessity of religion. Those are questions beyond the scope of my column, though.

Let’s look at issues closer to home. Faith and reason are essential components of parenting teenagers and of protecting and growing your wealth.

Managing investment portfolios is more than a little bit like parenting teenagers: Some things will work out well; some will work out okay — and there are going to be a few disasters along the way. Just as we can not control the weather, nor control the forces and events that will play out in adolescents’ lives, we similarly cannot control market forces, nor the relative successes and failures of the companies that we own. At the same time, there are things we can do to make adolescence — and investing — go more smoothly.

When you’re parenting a teenager, you can tell ‘em what to do, but you can’t control what happens. As a portfolio manager it’s the same. I can purchase securities at fair prices, but I cannot (over the near-term) control the prices at which those securities trade. Just as good parental role-modeling tends to produce good kids and productive members for civil society, however, good portfolio decisions will invariably produce portfolios that will in time, grow in value, meet client goals and allow both clients and their advisor to sleep well each night.

As an investor, people say to me that investing is just a crapshoot. That it’s gambling; that we have little control over the stock market. This point of view is correct in some ways. But only at first glance. As a student of markets and business, the randomness, is actually much less than random over longer periods of time. (Think of the massively successful investor Warren Buffett, who says in the short run the market is a voting (popularity) machine, but in the long run it’s a weighing machine.) And just as in parenting, it’s possible to reduce the randomness just as we reduce the probability of poor paths that our children may take, when we parent (and invest) with sound strategy.

But let’s go back to the role of “faith” in investment markets. An element of “faith” underscores all investment markets. It, however, is so much more than that. Faith is the essential ingredient of a wealth-building society. Faith in the sanctity of property rights is the first and primary ingredient of financial transactions. Without that faith, the accumulation of assets doesn’t exist in anything but the crudest form (stuffing it under the mattress).

Just as in parenting, you at some point have to place some faith that God will watch over ‘em. As an advisor and portfolio manager I place faith that the securities that provide “security” (no coincidence in that name) and sense of well-being will in time grow with inflation and perform as well as the valuations at which we bought them warrant.

The key is in the “values.” If we buy at fair values and consciously avoid buying at high values, we will, like your teenagers, see in the fullness of time, well-maturing nest eggs and retirement portfolios.

What’s difficult in this time is to refrain from buying at poor values. That is what has made the last several months very difficult from the perspective of an advisor. Value in stocks and bonds and gold have become less compelling. Right now even “sitting on our hands” is a tough requirement. Markets are wiser than all the gurus combined. And markets today — as Gold hits $1340/oz and the Dow approaches 11,000 again — are speaking loud and with a clear voice. They are predicting that the U.S. government is going to print its way out of our current collective fiscal straights. Accordingly, I have faith, that they will succeed. Which is why reason dictates that gold and stocks will increase in value coincident to fiscal policy and the chosen path of printing our way to fiscal solvency. In real (inflation-adjusted, including dollar-denominated) terms, we may only break-even. But breaking even is so much better than the alternative.

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 Tuesday, October 5th, 2010 at 12:46 pm and is filed under Monthly Column. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.