Category Archives: Hot Topic Commentary

A Day in Your Life Well Spent – Event Recap April 10, 2015

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By Graham Acheson, Wells Fargo. Graham is a Level III Candidate and Society Member.

CFAMN members have learned about a variety of different industry specializations at “A Day in the Life” events. On Friday, we were introduced to CFA Charterholders Bruce Langer and Dan Aronson of EPIQ Partners, LLC. Their topic was a new one for this series: Entrepreneurship. This idea, a dream for many Americans, also stimulates fear in some of the most motivated individuals. With their hour and a half, they managed to bring to life many of their experiences.

As they begin, “If we can do it, anyone can do it” seems fitting for a series on starting your own business. However, this is not a motivational speech. This is truth, a statement on their abilities in comparison to those in the audience. More importantly, Dan asks us to be honest with ourselves, “Is this for you?” And if you just answered “yes,” the next step is to see a psychiatrist. Really. They did. Bruce and Dan met with a professional, not to see if they were crazy for considering this endeavor, but to understand each other and create a foundation for a hopefully long partnership.

Forming EPIQ on values that they both agree on, Bruce says that he is happier as a business owner, and without having met him in the past, looks happier too. This exuberance comes from a lifestyle prepared long in advance. The business was overcapitalized, answering a question on fear and uncertainty posed from the audience. Two and a half years in, much of the initial capital still remains. Keeping their costs down was vital for a duo that prides itself on people, not perception. The partnership is at the core. Both agree that they, together, are the most important part of the business. In an upcoming event, they plan to rent a car and drive a couple of clients down to the Berkshire annual meeting. At a larger firm, this event may be overlooked or even considered unnecessary, but as their own bosses, they decide what adds value to their clients.

Their current situation is, as they state, “two men and a Bloomberg,” but they have found a niche. Working on what they add and outsourcing the rest creates a brand their clients can understand. As a small business, inefficiencies still exist. Learning to live with them, and spending a day setting up the complicated business phone system, will get you a long way. A sense of slow and steady comes to mind. With a tone that heeds warning not to overextend yourselves, Dan mentions that in their 600 square foot office, the conference room is the break room is the front desk. In answering another question, think strategy, not simply a plan. Being patient and accountable, they never had to consider supporting a failing business. The thought of continuing just to make it work was never required.

So, if you were looking to make this leap, hopefully Dan and Bruce detailed the pros and cons of forming your own registered investment advisory firm. If you were there for some entertainment, anecdotes of the struggling professionals with three kids each satisfied. And if you showed up just to get a free lunch, the CFA society always provide it. Whatever the reason for attending, the A Day in the Life series truly betters our membership. When you have a chance, check one out, there is a topic for everyone and it would be a day in your life well spent.

How a Famed Mathematician Can Make You a Better Investor

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Adam Schwab, CFA, CFP

In the pursuit of building an investment education, I have found most insightful investment principles are often discovered in other disciplines. Investment books can be great, but most just rehash the same superficial material. True investment insight flows from deep principles that originated from other academic and professional fields.

Richard Hamming was a world renowned mathematician who pioneered research in computing and physics. He worked at the famed Bell Labs, helped design atomic bombs at Los Alamos, and advocated the redesign of mathematics education. Not only were his ideas valuable in computer science and physics, they clearly crossover into the investment world.

So what insights can Hamming share with investors that will enable a successful investment strategy?

Two foundational articles provide great insights for both beginning and sophisticated investors: “You and Your Research” and “A Stroke of Genius in Striving for Greatness in All You Do”. These articles provide a solid blueprint for constructing an investment education. Here are four ideas that readers can implement today.

“Great scientists have independent thoughts…and have the courage to pursue them.”

Hamming talked about the courage young scientists had to pursue new thoughts, instead of sticking with traditional methods. Great investors follow the same path. Independent thought is the linchpin for successful investing. Unaware to most investors, the outside influences we subconsciously entertain degrade the rational and logical mind necessary for investment success.

Great investing ideas often involve courage. The best opportunities are likely out of favor and take significant diligence to understand. Independence provides the clarity to see ideas in an unbiased light.

Investors are constantly being told what to buy, what to sell, and what to worry about. Sophisticated investors are extremely selective in what ideas and opinions they let through their filter. Investing doesn’t have to be a solo act, but each investor needs to build their own foundation.

Solution: My preferred method is to learn from other experts who have exhibited independence throughout their careers. Borrow ideas to fit your situation and mindset, rather than reinventing everything yourself. Some of my favorite examples are Richard Feynman, Teddy Roosevelt, and John Boyd.

“Knowledge and productivity are like compound interest. The more you know, the more you learn; the more you learn, the more you can do; the more you can do, the more the opportunity – it is very much like compound interest…One person who manages day in and day out to get in one more hour of thinking will be tremendously more productive over a lifetime.”

Investing requires diligent and consistent effort to build the competence to judge ideas and have the courage to stick with investments when times get tough. Investors have a nasty habit of interrupting compound growth to pursue hot ideas with a catchy story. Investor’s self-sabotage causes more problems than any geopolitical crisis or recession ever will.

Solution: Leverage great investors. My top 3 are Howard Marks, Warren Buffett, and James Montier. Build off their successes by reading one of their letters daily. Consistent effort in just a short time will yield tremendous results.

“You have to neglect things if you intend to get what you want done. There is no question about this.”

Not only is this quote practical for everyday life, it is also necessary for investors. There is too much information and distractions that bombard investors. To gain the necessary investment expertise and analytical edge, all superficial noise and wasted activity must be filtered away from investor’s attention. Whether it’s endless market commentary or concerns coming out of Europe, most of what investors read and hear has no useful purpose.

Solution: Make a conscious choice to go on an information/activity diet. Free up time that can be committed to building a particular investment skill. Abandon the thought of trying to conquer everything at once. Read a 10-K/Annual Report in your favorite industry each day and watch how a singular focus can deliver rapid investment growth.

“The people who do great work with less ability but who are committed to it, get more done that those who have great skill and dabble in it, who work during the day and go home and do other things and come back and work the next day. They don’t have the deep commitment that is apparently necessary for really first class work.”

Hamming’s insight is a great reminder to investors that investing is long term commitment. Just as great authors commit to their craft, great investors need to apply consistent effort in building their mental toolkit.

Solution: Decide how passionate and committed you are to improving your investment ability. The real test will occur when boredom & repetition sets in and you face a choice: keep building your skill or give up and see your progress unwind.

Adam Schwab, CFA, CPA is a portfolio manager at Elgethun Capital Management

Recap of Society Luncheon – The Return of Volatility – Monetary Policy Divergence Brings the Return of a Long Forgotten Friend

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By Tom Halloin, CFA Society Minnesota Intern

Central banks are starting to diverge in their monetary policies. Marvin Loh, a Managing Director at BNY Mellon Global Markets and the firm’s senior fixed income market strategist, spoke with CFA society members about potential consequences of diverging monetary policy between central banks. Interest rates, for instance, have collapsed worldwide since the financial crisis in 2007, with some countries such as Germany realizing near-zero or negative yields on bonds out to seven years. While the Federal Reserve of the United States has stopped purchasing securities through Quantitative Easing, European and Japanese central banks continue their own quantitative easing programs in order to stimulate their economies. As a result, the best currency trade in recent months has been to buy the dollar and short the euro.

The diverging monetary policies also extend to the Federal Reserve’s decision whether to raise the Federal Funds rate. Many investors are anticipating the Federal Reserve will increase the Federal Funds rate as early as this June.  While the consensus among economists is that inflation will remain low for the foreseeable future, the Federal Reserve wants to mitigate the creation of asset bubbles as a result of a prolonged period of near-zero interest rates. There is less consensus, however, as to when the Federal Reserve will start to raise rates and how quickly rates will increase in the next two years. This lack of a consensus is an issue because markets can react violently to any slight change in monetary policy. With diverging policies between central banks internationally and diverging expectations on interest rate changes in the United States, expect volatility throughout the fixed income world in the near future.

Impact Investing Tipping Point – After a decade in the trenches, signs of progress

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Adam Seitchik, CFA

Adam Seitchik, CFA, CIO of Arjuna Capital

I went to Minneapolis this winter and something remarkable didn’t happen.

I had accepted an offer to speak at a conference on impact investing for local investment professionals. The sponsor was the CFA (Chartered Financial Analysts) Society of Minnesota. The event was sold out and the room was full despite a high temperature of 0o F on the day. We convened at the Minneapolis Club, which feels more like a place to drink brandy and clip bond coupons than discuss innovations in sustainable investing.

Just a few years ago a group of wonky CFAs like this (it takes one to know one) would mostly be asking skeptical questions about the dangers of mixing social purpose with wealth building. But somehow we seemed to have reached a tipping point and that tired old elephant was nowhere to be found in the room.

Instead, to my delight and amazement, one of the keynote presentations was from Wellington Management, a former employer of mine. Wellington is one of the largest institutional global money managers in the world, with almost $1 trillion (!) in assets under management. Their clients include pension plans, insurance companies and giant pools of state-owned assets from around the world. And at least when I was there, the client list included sultans, kings and princes.

I left the world of institutional money management over a decade ago precisely because places like Wellington were completely uninterested in, and indeed often hostile to, the idea of impact investing. Yet we heard in Minneapolis that Wellington now has a dedicated team of analysts helping portfolio managers understand the Environmental, Social and Governance (ESG) risks and opportunities that are embedded in their portfolios.

I was asked to speak because many of the investment advisors in the area are getting inquiries from their clients about socially and environmentally impactful approaches to their investments. The money managers are scrambling for solutions.

We sometimes refer to what we do at Arjuna as “total portfolio activation,” and I described how we empower client impact across asset classes. Like Wellington, we integrate ESG analysis into our equity investment strategy, but more consistently and comprehensively. As innovators focused solely on sustainable investing, we have created multiple avenues for our clients’ money to have real, tangible impact in the world. The arrows in our quiver range from shareholder engagement with publicly traded companies, to investing in a host of financially promising private enterprises with demonstrated social and environmental impact. We don’t have the conflicts of interest inherent in the big firms, whose clients often include the very companies in which they invest. We work for the enlightened shareowners of corporations, not corporate managements themselves.

When it was my turn to speak I noted how struck I was that Wellington was there in the first place. I spoke of the impact investing field in generational terms. Gen 1 were the pioneers, emanating mostly from Boston in the early 1980s, who built the foundational infrastructure measuring and monitoring corporate environmental and social performance. I am part of Gen 2. My bias as an institutional investor coming into the field of sustainable investing was that the Gen 1 firms combined an admirable idealism with a fairly rudimentary approach to investing. The niche was small and underdeveloped.

Gen 2 worked to create a performance-oriented approach to impact investing. We were learning about sustainable investing while modernizing it with state-of-the-art tools and practices. The field began to mature and to grow. Perhaps a broader perspective on investing would enhance shareholder value, not put it at greater risk.

Gen 3, which represents established institutional money managers exploring sustainable investing, was for years largely reactive and inauthentic. With strong encouragement from important, mostly European clients who were signatories to the UN Principles for Responsible Investment (www.unpri.org), the big players have been pressured over the last few years to report on their ESG investment strategies. Eventually, what gets measured gets managed, and now we are seeing some nascent attempts by mainstream managers to do this work seriously, properly and comprehensively. Mainline firms for the most part haven’t fundamentally re-engineered themselves, but for the first time I’m seeing the early shoots of something real.

What nearly brought me to tears at the Minneapolis Club on a winter’s day was imagining Gen 4: the millennials who, as study after study reveals, want meaningful work within humane organizations that positively impact our world. Unlike all those who came before them, Gen 4 investment professionals, even in places like Wellington Management, will not know of anything other than ESG-integrated investment approaches. These young men and women whom I work with and teach give me hope. Soon they will be in charge.

For baby boomers like me, they are a defense against critiques that we’re nothing but greedy, selfish narcissists. If the most important test of a generation is the quality of its offspring, then maybe we aren’t so bad after all.

3 Ideas to Implement Today from Buffet’s Annual Letter

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Adam Schwab, CFA, CFP

Warren Buffet’s annual letters are usually packed with interesting insights, but for the past couple years I had been a little underwhelmed by his thoughts. This year’s letter was the exception. As I read the letter for the second time, I realized Buffet laid out exactly how an investor should construct an investment portfolio and evaluate businesses. Although investors won’t find actual recommendations, he delivers something more valuable: a framework for selecting and analyzing businesses that any serious investor can follow. If these lessons make sense to you, you will want to read the entire letter here.

It’s ironic that the lessons seem logical and obvious as he describes them, yet 90% of investors (both individual and institutional) will completely fail at following half of his advice. We can attribute that to attention spans of zero and the general get rich quick mentality. If investors can avoid those handicaps, this year’s letter was a real goldmine for investors who are looking for a sensible way to think about investing.

Although he gives his secrets away for free every year, implementation is always the hard part! I picked out a few of the best and most practical insights that you, the investor, need to follow. By shamelessly stealing Warren’s investment principles, you will be 95% of the way to an effective investment portfolio. Now, the lessons…

One: Businesses > Treasuries

Warren wasted no time describing the tremendous outperformance of U.S. businesses over US dollar denominated bonds over the past half century. As most investors flock to “safe” U.S. treasuries, Warren’s extols the impressive track record of owning American businesses over long time periods. The common perception that stocks are risky and bonds safe is completely discredited by the long term data. Of course, this is no absolute guarantee this will repeat in the future. But consider what you would rather own for the next 30 years: a sensibly priced business that can compound value at 10-15% per year or a 30 year treasury delivering 2.7%?

Investing should be thought of as buying businesses, not trading stocks. Buffet has slowly and methodically built his portfolio of great businesses without the manic-depressive emotions that occupy most investors. Your portfolio should be structured the same way. If you have the time and aptitude to evaluate businesses, wait until they go on sale, and then start building your portfolio.

Two: What Matters Most: Durable, Competitive Advantages

Buffet highlights one the best but most forgotten elements of investing. Warren and Charlie own businesses with durable competitive advantages that can compound value over time without needing excessive capital investment. Notice how he didn’t mention fast growth, growing market share, exciting technology, or world-changing products. He distills a great business into one line.

But how quickly do most investors forget what really matters! 99% of investing conversations revolve around superficial topics that are heavy in excitement but rarely touch on the elements of investment success. Do your investments satisfy this simple test? This idea is powerful because 1) it’s free and 2) most investors won’t use it! Resist the urge to fool yourself into thinking you can ignore this advice and “beat the market”. Your portfolio will thank you.

Three: Price Matters

Although Buffet expounds on the promise of great businesses, he doesn’t pay any price for them. Even Buffet admits that at close to 2x book value, Berkshire may likely see price declines in the near future. How refreshing to have a CEO give an honest assessment of the stock price! Not many CEO’s admit their companies are priced to perfection; in fact today most CEO’s are paying egregious prices for their own stock!

Great businesses still need to be bought at sensible prices! What is sensible is debatable, but if your business evaluation skills are sufficient it’s generally achievable to be roughly right on the price. Great businesses are not on sale very often, but it certainly happens. The key is buying with deployable cash to pounce on opportunities (The 2008-2010 timeframe being the last great opportunity).

Price is an area where most investors screw up. We are hardwired to buy high and sell low, and even the best businesses make poor investments when bought at the wrong times. Activity will be skewed toward inaction 90% of the time, but the other 10% will provide incredible opportunities to pick up wonderful businesses at bargain prices.

Bonus: Charlie Munger’s Thoughts

Followers of Berkshire know the wisdom of Charlie Munger. Charlie didn’t disappoint as he gave us a few pages of insight in this year’s letter. I’ll leave you with one piece of advice that applies to both investing and life. Here Charlie describes one of the many aspects of how Warren set up his system for Berkshire Hathaway:

“His first priority would be reservation of much time for quiet reading and thinking, particularly that which might advance his determined learning, no matter how old he became…”

What great advice for investors and people in general! Notice he didn’t mention checking stock prices, scheduling meetings, or email. Great investors and great ideas are not built from at frantic pace at which the market operates. The compounding of knowledge over time will pay some large dividends if you don’t interrupt the process!

There is a treasure trove of great advice from Warren and Charlie on the Internet. Let me know and I can directly point you to the best material out there.

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Adam Schwab is a portfolio manager at Elgethun Capital Management. Prior to joining Elgethun, Adam was a portfolio manager at the South Dakota Investment Council. He managed a $250 million large-cap global equity portfolio for 5 years and a $90 million SMID portfolio for 3 years. Adam is a CFA charterholder and a CPA. He has an MBA from the University of Chicago Booth School of Business and a degree in Finance from the University of South Dakota. He currently serves as a Trustee for the University of South Dakota and also serves on the boards of the Sioux Falls City Employee’s Pension Fund and Alta Trust. Outside of work, Adam has been married to his wife Sarah for 6 years. He is active in powerlifting, competitive taekwondo, and the outdoors.