Dear Family, Friends and Clients:
You can gain some pretty good insights from reading 2,000-year-old books, and although the stoics sometimes get a bad reputation for their dispassionate disposition, this aspect of stoicism is perfectly matched to successful investing. Focusing on perception, action, and will allows us to see the world as it is, respond in a manner calculated to provide favorable outcomes, and control our inner dialogue to prevent doubt when we know that our logic and calculations are sound.2 It is with this set of tools that we endeavor to create a solid foundation to support your success.
Our second principle is that “Price Matters”. In other words, we always attempt to purchase securities with a margin of safety, and we utilize fund managers who do the same. “When you build a bridge, you insist that it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.”3 We buy securities trading at significant discounts to their reasonably calculated intrinsic value, so that we do not allow our future success to hinge on perfect outcomes.
Instead of trying to outguess our fellow market participants, we prefer to spend our time focusing on the things we can control. Looking through our list of principles, this should become apparent. We aspire to control our emotions, our liquidity, the number of decisions we make, the time-period over which we measure our progress, and most importantly the price we pay. While the fluctuations of security prices can be both exciting and devastating, they are completely outside of our influence. The price we pay, however, is firmly in our control. Warren Buffett once said, “The three most important words in investing are margin of safety”.
The importance of margin of safety is derived from the axiom that “Price is what you pay, value is what you get.”3 It’s not enough to simply identify a good company with able and competent management. We also need to be conscious of paying a fair price based on a reasonable calculation of the underlying value of the business. The price you pay will invariably determine the rate of return you earn over long periods of time. It is always important to remember that a great company with favorable prospects for the future is not necessarily a great stock if the price is too high; you may end up paying for anticipated earnings that will not materialize for decades.
Our first two principles go together; however, they are not the same. While having a margin of safety is a necessary condition for differentiating investment from speculation, it is not sufficient on its own. “And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.”4 Limiting our analysis to facts, and directing our decisions toward our control, tips the scales of success in our favor over long periods of time.
“Risk means more things can happen than will happen.”5 And while we can’t control the madness of crowds, or the tastes and opinions of markets, we can control the return that we demand for putting your money to work to reach your financial goals. Our commitment to you is to be clear in our perception, deliberate in our action, and firm, yet humble, in our will, so that together we can move forward with progress toward your ultimate success.
On behalf of our entire team I would like to wish you the very best for a happy and rewarding 2018. We will spend our time diligently identifying opportunities for you in the investment markets while also taking into consideration the extensive tax law changes. After all, it’s not what you make that matters, it’s what you keep!
W. Allen Wallace
Director of Wealth Management
1 E., & Matheson, P. E. (1916). Epictetus: the discourses and manual. Oxford: Clarendon Press.
Epictetus was born into slavery in 55 AD. He died at age 80 a powerful orator, philosopher, teacher and free man whose stoic philosophy would influence powerful leaders, including Roman emperor and general Marcus Aurelius and President Theodore Roosevelt. While he was not the first stoic, his pupil Arrian’s notes on his teachings are the first and most complete writings we have.
3 Buffet, W. (2009, March). Berkshire Hathaway 2008 Annual Report Chairman's Letter.
"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
5 Dimson, E. (n.d.). London Business School, London, England.