We’ve Gone Completely ‘Off Model’

While meeting with a marketing agency last week I was asked to explain what was different about the way we invest. What is our ‘key point of difference’ compared to, say, your average managed fund. By far the most significant difference is that we don’t use a model portfolio. In this way we also differentiate ourselves from the majority of IMA’s and SMAs (Individually and separately managed accounts) because they also all use model portfolios.

Saying goodbye to the model portfolio

You don’t have to be a fund manager to know that markets go up and down. Yet it seems that many of the supposedly ‘smart’ investment managers writing mandates for managed funds have forgotten this key piece of information.

Cash is king, and the key to out-performance

If you invest in a managed fund, and it is mandated to hold X percentage in one sector, and Y percentage in another, and maximum 15% cash, what happens when the whole market falls? What happens if the whole market falls like it did in the GFC? Even the ‘fund manager of the year’ won’t be able to save your investment from declining. Why? Because there is nothing he or she can do, he can’t move the entire portfolio to cash because more than likely he can’t hold more than 15% cash under his mandate and because even if he wanted to the portfolio is too large to liquidate. (the fund manager of the year manages 4.1 billion dollars)

Saying goodbye to the model portfolio allows us to do what other fund managers can’t. Hold 100% cash if we choose, and move in an out of stocks based on opportunities that present themselves. This leads directly to our next point.

The (trading) opportunity of a lifetime comes around twice a week

In the stock market it might actually be more than twice a week if you know where to look. This is why we based our investment ‘model’ on a cash portfolio. All you need to be able to do is be patient enough to wait for the opportunities to come to you, and I assure you, this is harder than is sounds. But if you can be patient and wait for the market to deliver you an opportunity to buy a great company at a great price (typically when no one else wants it) you have greatly increased your chances of profiting from your investment.

Buying when other are selling is tough

By far the hardest part of our trading strategy is buying quality stocks when they are down. This means buying them when other people are selling them. At times this can be a gut wrenching experience.

Understanding the investment and doing your research is key

One of the biggest keys to our success in the market is having a solid understanding of the businesses we invest in by conducting comprehensive research into them before making an investment. The most important function of the research (besides understanding what we are buying) is it helps us be confident enough to buy these companies when they are on sale.

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