Independent Wealth Management
Who scrutinizes your investments, designs and tests your retirement and education plan, searches for new investment ideas, patrols insurance agents and mortgage brokers, shows you strategies designed to reduce your investment costs and income taxes, monitors your 401(k), promptly responds to your email, provides one monthly statement, day-to-day net performance across all of your accounts and does all of your paperwork...We do!
4 Retirement Reality Checks
Living a comfortable retirement means planning for how much you will need now, when you have the ability to put away the money to do so. What is your picture perfect retirement? Are you…
• Living on a boat, seeing the world one coast at a time…
• Travelling, seeing all of those places you have imagined over the years…
• Spending time at home with your grandchildren, enjoying friends….
• Starting a business or investing more time in a lifelong hobby.
Today's retirees are doing much more than they used to….and the costs of retirement are also much different. In order to better understand how much in assets you need to accumulate (and earn in company pensions and social security), to live the type of life you want…you should know what your retirement life is really going to be like. What should you be planning for?
Rafael Velez
in Financial Planning, Retirement
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Overconfidence & Attribution Bias
Dream road is littered with great ideas that were going to solve everything. Many proposals were so sure to be successful that money fell out of the sky to fund them. In sports, talent at times can be so dominant that any opposition is a futile. Remember when the New England Patriots were so dominant that the New York Giants had no chance in the SuperBowl?
I’ve learned to be rather quiet about absolute convictions. Loud conviction likes to make a mockery of its believers. How did Eli Manning make that throw? It was as if the gods of irony all agreed to make bumbling fools of the experts. It just goes to show how dangerous overconfidence can be. Overconfidence will have you ordering the championship cake before the first quarter starts...only to give it embarrassingly to the stadium security staff later that evening.
No one wants to believe they may be in their own way, especially when it comes to investing. Yet, research has shown there are several common biases that can cause an investor to make decisions based more on emotion, than on strategy or science. This can impair investment returns...and in some cases, a total loss of capital.
Margin of Safety
The world around us has many risks that we cannot control, so we plan accordingly. Essentially, you give yourself some room for error — or a margin of safety in the event something unexpected occurs or your assessment is overly optimistic. In the investment management process, there’s also a margin of safety. While the term may have many different connotations in finance, the most common usage occurs in security analysis, where it refers to the amount by which a security is priced (or “available for purchase”) below its intrinsic value.
"Price is what you pay -- Value is what you get", said Warren Buffett. Valuing a business is, therefore, a fundamental skill that every value investor must master to be able to discern the intrinsic value of a business. If you’ve already guessed this has something to do with value investing, you’re right. Benjamin Graham, who is often referred to as the father of value investing, first introduced the term in his 1934 book, Security Analysis, which he co-authored with David Dodd. He later revisited it in the much more readable The Intelligent Investor, published in 1949. Today, many well-known value investors, including Warren Buffett (“Berkshire Hathaway”), Mason Hawkins (“Southeastern Asset Management”), Seth Klarman (“The Baupost Group”), Glenn Greenberg (“Chieftain Capital”), Charles Brandes (“Brandes Investment Partners”), Robert Rodriguez (“FPA Capital”) and Joel Greenblatt (“Gotham Capital”) are advocates of the concept.
Allocating Capital and Bias
Why do investors fall in and out of love with stocks at exactly the wrong time? Strong recent performance (“momentum”), fleeting fads and promises of huge growth potential are irresistibly compelling to inexperienced investors as they push their valuations up to unsustainable levels. After investors have experienced negative earnings surprises (which is inevitable), they overreact once more to the prospect of lower growth. What is the driving force behind this? Why do companies doing so well suddenly disappoint? Why do shares which outperform in the short term underperform over longer periods? The answers lay both in the allocation of capital and associated psychological biases or tendencies.
Companies do not exist in a vacuum. Their fortune is determined, to some extent, by the activities of other businesses. Relating a company to its environment is the essence of determining sustainable competitive advantage; which some believe is the prime determinant of investment success when combined with purchasing an interest below a conservative estimate of intrinsic value. In the book Competitive Strategy by Professor Michael Porter of Harvard Business School, he outlines five forces which influence a firm’s strategic position.
