At Saracen, we believe the following:
- Diversification is one of the few free lunches in investing. All asset classes are necessary and deliver returns in different environments thus helping to reduce volatility.
- Leverage can never make a bad investment good, but it can make a good investment bad.
- Never invest in something you do not understand.
- You get what you do not pay for. Fees add up – they may seem trivial in the short term, but a manager that makes 9% p.a. over 30 years makes a total return of 1,326% whilst one earning 10% p.a. over the same time period returns 1,745%.
- Over the short-term, equities may be highly volatile; however, over the long-term they main component needed to grow capital and earn a return above inflation. In fact, over the long-term they are the only stable asset class with US equities averaging 6.5% -7% real returns.
- Beware of good short-term performance – it is one of the most overrated statistics in manager selection (although there is correlation between long-term performance and future results). Cambridge Associates in their analysis show that virtually all top quartile managers over a decade will have at least one three-year rolling period when they are in the bottom half of manager performance while 40% will be in the bottom decile. David Swensen, CIO of Yale Endowment, shows that asset weighted returns for managers are below actual returns for most of the investment industry. John C. Bogle, Founder of Vanguard, has produced research showing how manager performance is mean reverting. Whilst GMO have shown that managers who were fired for poor previous 3-year returns subsequently outperformed the managers that replaced them!
- Beware! Markets mean revert.
- We prefer boutique managers to large investment banking complexes. They are independent, have only one set clients to please, are more focused and have less conflicts of interest.
- In most scenarios, assets are the enemy of performance.
- Risk is not volatility. It is the permanent impairment of capital. This comes from three sources – leverage, business quality and valuation. The latter is the market not knowing how to price an asset.
- As Warren Buffett has stated, “Be fearful when others are greedy and greedy when others are fearful”.
- Market timing is dangerous and rarely produces successful results.