strategy

Investing Superheroes: John Bogle

John Bogle has been a financial industry pioneer and respected spokesman for over fifty years. As the founder of The Vanguard Group, which specializes in low-cost index funds, he’s had tremendous impact in driving down the costs and complexities of market participation for millions of investors. Many of the standard components of sound investment advice weren’t standard before John Bogle.

Bogle’s Key Strategic Concepts:

  • Bogle starts with the importance of long-term thinking to investment success. “The historical data support one conclusion with unusual force: To invest with success, you must be a long-term investor”. This advice is so commonly heard, that it is easy to overlook the meaning. He continues this thought saying that “In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses.” The long-term investor should be chiefly concerned being invested and earning the cash flow and growth generated by the businesses that he or she owns. The price of this growth and cash flow (to Bogle, “the markets”) will fluctuate and these fluctuations become meaningless over a longer time-frame.
  • “Time is your friend; impulse is your enemy” Bogle urges investors to be patient and to avoid hasty decisions. His advice is similar to the old saw “measure twice, cut once”. In other words, once we’ve started on a solid long-term investment strategy, the best thing we can do as investors is to let time and compounding work for us. Getting impulsive and changing strategies (“the enemy”) can do huge damage to our returns. 
  • John Bogle began thinking about index investing back in 1951 hinting at the idea in his Princeton thesis. The basic concept of index investing is to ignore trying to sort out “good stocks” from “bad stocks” and simply buy a diversified group of stocks as inexpensively as possible. In other words, “Don’t look for the needle in the haystack. Just buy the haystack!” It often sounds promising to try to find the best stocks, and many investors do exactly that. However, this means that the best companies often have the highest stock prices, making them not necessarily the best investments. 
  • Our favorite Bogle quote gets straight to the heart of our investing philosophy at Svane Capital. “Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of ebullience and the depth of despair alike that this too shall pass”. Of course we must understand and focus on the long term characteristics of markets and use appropriate investing strategy. But we must also understand the normal short term behavior of markets, and use this to our advantage when possible. Day to day, and even month to month price action in markets, can be thought of as mostly random with inevitable swings from extreme optimism to extreme pessimism. It is at these extremes where the greatest opportunities are found. At these points the right decisions can feel scary or even wrong. Using these times to our advantage depends mainly on our courage, discipline, and understanding that they don’t last forever.

John Bogle had been thinking about the concept of index investing since writing his thesis in 1951. But he credits support received from Nobel prize winner Paul Samuelson, Charles D. Ellis, and Princeton Professor Burton G. Malkiel in creating a business to capitalize on the idea. 

Bogle founded The Vanguard Group in 1975 launching its first index fund in 1976. In 1996 he retired as CEO, but the company he started continued to grow into one of the largest mutual fund companies in the world today.  Two of his most popular books are “Common Sense on Mutual Funds”, and “The Clash of the Cultures: Investment vs. Speculation”.

Sources: www.johncbogle.com, www.vanguard.com, www.investopedia.com

SVANE CAPITAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.

Investing Superheroes: Howard Marks

Howard Marks has demonstrated the concept of consistent excellence as an investor, managing portfolios for over forty years. Marks has one of the best long-term track records over this time frame. He has led Oaktree Capital Management since founding the company with five other partners in 1995. 

Key Concepts

  • Markets are random. Investing strategies must take this into account. Howard says, “You can’t tell from an outcome whether or not it was a good decision. Even if you know what is most likely, other things can happen.” Of course this brings to mind the importance of diversification and limiting Portfolio exposure to any single factor. However, this statement also points to the difficulty of knowing whether an investor is good or just lucky. The same concept applies in determining whether an investment plan is on track in spite of initial poor performance. Marks’ answer is to focus on the decision making process rather than the results of this process.  
  • Consistency trumps outstanding individual results over the long run. Marks says, “Be a little bit better than average all of the time.” A study he did over decades of market performance showed that the top ten percent of long term investors showed up in the second quadrant decade after decade, being rarely either in the top group, or below average over those periods. He says that trying to be a top performer, rather than just being consistently better than average, usually requires taking too much risk and relying on luck. 
  • “You don’t make money by buying good stocks. You make money by buying assets for less than they are worth.” Howard is saying that even an excellent company can be a terrible investment. For example, an investor buying Cisco, Intel, or Microsoft in 2000 ended up with poor results even though those companies are still market leaders sixteen years later. Might Facebook, Amazon, or Tesla be similar today? Conversely, Marks points out that truly massive investing profits were made in the 1980’s in bonds that were more likely to default than to pay off. It’s all in the price and he encourages investors to avoid popular investments while giving those that “everyone knows are bad” a second look.   

Brief Bio

Marks started his career as an equity research analyst for Citicorp in 1969. From 1978 to 1985 he served as Vice President and senior portfolio manager focusing on convertible and high yield debt. In 1985 he joined RCW Group and again led he high yield and convertible securities group, but also started one of the first distressed debt funds in a mainstream financial institution. 

Mr. Marks periodically writes his widely read “memos to Oaktree clients” which outline his views on investing the markets and economics. Warren Buffett has remarked, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book”. In 2011, Marks published “The Most Important Thing: Uncommon Sense for the Thoughtful Investor” via Columbian Business School Press. 

Sources: www.oaktree.com, www.wikipedia.com , www.youtube.com 

SVANE CAPITAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.

Short Squeezes & Apple Juice

apple-juice

Have you ever found yourself between a rock and a hard place? How about caught in a vice? Being in a squeeze is an unpleasant experience, but in a market short squeeze, it all depends on one’s perspective. 

In mid-January, we couldn’t find more than a handful of optimistic perspectives on oil, industrial metals, emerging markets, or gold. It wasn’t for lack of looking. The consensus opinion was that the bear markets might never end. Prices would decline, and then decline some more. But since those lows Brazilian & Russian equities have jumped 35% and 28% respectively, oil has increased 38% while gold rose 22%. Aluminum producer Alcoa surged 54% with miner Freeport McMoRan running up 186%!  Why? Mainly because eventually everyone that wanted to sell at those prices got done selling. Then buyers that had been watching and waiting to take advantage of even lower prices, suddenly had to compete against each other. In market terminology, what happened is known as a squeeze. 

Imagine a market where each day apple growers bring apples to sell and where apple juice-makers purchase their daily supply. Suppose that one day one of the growers announces that she has had a plentiful harvest and needs to sell two full wheel barrows rather than her usual one. She begins reducing her price to sell the first load quickly. Some juice-makers buy the apples they need, but as the price continues to drop they also buy enough apples for tomorrow and then head back to the shop. But one juice-maker sees the price dropping and decides to wait for the arrival of the second wheel barrow, when surely he’ll be able to purchase all the apples he needs at even lower prices. The price continues to drop as other fearful apple growers reduce their prices. Afraid they may not be able to sell all of their apples, they hurry to sell as quickly as possible and are willing to accept lower and lower prices. Compounding this, many buyers have already left the market having bought as many apples as they could cart back. Anxious sellers, and dwindling buyers continue to drive prices lower. Then our original fortunate grower returns, wearing a long face and carrying just one small bucket. Birds have eaten her remaining apples while she was away, and she only has a few left to sell.

Of course, we know the rest of the story…she sells her remaining apples at a price dramatically higher than the original price. Our opportunistic (greedy?) juice-maker is squeezed! He has to outbid the rest of the market, regardless of price, in order to purchase the apples needed to run his business that day. The fortunate apple-grower has sold a few apples at a high price, but a whole wheelbarrow at low prices. Fearful apple growers have regretfully sold their production at losses, but some wise, value-sensitive juice-makers have ensured themselves of not one, but two profitable cycles of production.

The moral? Market participants should avoid competing with frenzied herds of either buyers or sellers. Buying value is wise, but trying to buy the bottom, or sell the top is hazardous.


SVANE CAPITAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.

Time Is On Our Side

And time goes by so slowly
And time can do so much
— The Righteous Brothers (Unchained Melody)

FV=PV*(1+r)^t is the formula for what Einstein called the Eighth Wonder of the World, namely the power of compound interest. Time is the most important driver of this wealth building equation, but it can also be the most difficult part for real investors to harness because of the fact that we are ourselves bounded by its constraints. As seemingly important information (news headlines or price changes in our portfolios) is constantly arriving, there can be a strong urge to periodically change course, and therefore possibly press reset on the all-important time variable.

We’re fairly certain Tom Petty wasn’t thinking about investing while he sang “The Waiting”, but he could have been. In fact, rather than “seeing a card” every day, as investors, we may only “see a card” that actually matters every few months. Because if this, it is critically important that we have confidence in our strategy can therefore wait patiently, and without undue concern. If we aren’t able to stick with our plan through down periods, we simply can’t expect to achieve our long term investment goals.

The waiting is the hardest part
Every day you see one more card
— Tom Petty & The Heartbreakers (The Waiting)

Research shows that the returns actually achieved by many investors fail to measure up what might have been expected given the options available to them (and the known ex-post-facto returns of those investment options). Perhaps the best known study is done by DALBAR, Inc. and updated each year. Some noteworthy findings from the 2015 summary:


•    The 20-year annualized broad market equity return exceeded the 20-year annualized return earned by the average equity investor by almost a 2:1 margin (9.85% vs 4.66%)


•    In 2014 both the broader stock and bond markets outperformed the average stock and average bond investor by factors exceeding 2:1


•    This under-performance of the average investor occurred in spite of him/her “guessing right” 8 of 12 months (as judged by subsequent months’ performance)


These performance discrepancies are mostly due to asset class selection and the timing of the buys and sells of the asset classes. Many investors inadvertently end up with a start-stop-start-stop approach. Even if this is unintended, and even if the starts and stops only happen on just a very few occasions, the damage done to overall returns can be substantial.

Despite being generally “right” about immediate market direction, investors as a whole under-perform the broad market indexes because being out of the market earns nothing, and also because by the time a move feels right, it is often almost over.  The magnitude of market impact for unexpected events exceeds the magnitude of market impact for expected events by a substantial margin. Many investors fail to account for these surprises (which we know are bound to happen, but for which we don’t know the timing) in their investment plan. 


Given the meager actual performance of intelligent and motivated people, what should we do to place the odds back in our favor? In the simplest possible terms, what matters most is sticking with a reasonable investing strategy for an extended period of time. Three questions:

Question: What is a reasonable investing strategy?
Answer: A reasonable investing strategy holds different types of investments (diversification) and doesn’t try to time the market by repeatedly jumping in and out of investments. A reasonable strategy can also be biased toward more attractive values. 

Question: How can we make sure we stick with the strategy?
Answer: We should our portfolio risk constraints to a level appropriate with our individual situations and personalities. (This is why the risk profile we cover at the beginning of the process is so important, it directly influences the likelihood that we “hang in there” without too much teeth gnashing.) 

Question: How long do we have to wait?
Answer: That is a question that requires a statistical answer. One way is to note that many market cycles occur over 7-10 year periods (or less), so it is likely that within that period of time, our strategy and discipline will be rewarded. A longer answer is that it depends on the stochastic nature of the market process and the degree of certainty we require in our test. For example, how many times would we need to toss a coin before we can be sure we will have 50% heads and 50% tails?

In summary, as investors, we can maximize our probability of achieving good long-term returns by picking a good plan, and then by sticking to the plan, and allowing compound interest to work in our favor. While we can’t be certain about the exact future outcomes, due to the nature of risk, we can be confident about process and the overall probability of a positive outcome.