Making it Through the Territory - Why FIM

“I just want to make it through the territory,” a FIM Group client told me back in March 2009. “It’s that simple.” The client had been with us for over 12 years, having hired us while he was still employed, and he is now several years into his retirement. The “territory” he referred to is the next 20 to 30 years of his life funded by returns from his investment portfolio. Fear was more than prevalent this last year, making most people perceive the world differently. News headlines were laden with foreclosures, layoffs and bankruptcy, coupled with massive selling of stocks, bonds and real estate. Few realized, however, that the economic reality is that people and business will adjust as we have for centuries. This discussion of “territory” brought back memories of the westerns I watched and read about as a kid. Back then I was fascinated by everything (I still am), but as a kid I dreamed of being a cowboy and pretended I was John Wayne.

There was one western in particular about a wagon train full of characters, rich and poor, who went seeking a better life. The story was about psychology, faith, stubbornness, trust and truth. During the long journey, the wagon train endured many hardships and was repeatedly attacked by Indians and outlaws. John Wayne played a saddle-weary, leathery ex-military man who had seen it all. He lived hard, but always did what he had set out to do. There was discord among the ranks, and the rich family finally had enough of the fighting and depravation. Despite warnings from Wayne’s character, they turned back anyway. The scene ended with the sight of smoke on the horizon. The next morning the scout came back with a burnt teddy bear that belonged to the family’s daughter, indicating that the family didn’t survive. Of course, the final scene was straight from Hollywood, with the remaining families that “stayed the course” arriving in the promised land with beautiful meadows, running springs and sunny skies.

The investors that panicked out of the market collectively locked in trillions of dollars of losses. But this is not an article about panic or fear – we seem to have plenty of that to go around. Rather, it is about learning. A client asked me a few weeks ago what I had learned from this past year. Her question has since stuck in my head prompting me to articulate what I discussed with her and her husband.

First, we are long-term investors. We don’t manage money market funds, CDs or T-bills as our core business – we use them as tools. FIM Group was not founded on managing cash for clients, we have always been about long-term investing and solid wealth management advice. So our clients are primarily those who wish to accumulate a pool of resources that they can use someday to get through their own “territory” filled with ups, downs, manias, fear, greed, depressions, inflation, recessions, booms and busts. We have grown, because for 25 years we have stuck to our core competencies. When I said that to the client she said, “But Paul, what did you learn?”

I learned that people can collectively panic to an extent much more severe than I could have ever imagined. I manage money consistent with my easygoing, rational and patient disposition. I’ve worked side by side with hedge fund managers that are so short-term oriented that they have more trades in one month than we will have in one year. I have also worked in the brokerage industry where the “product of the day” is what’s important.

Back in the early 1980s, real estate, leverage, leasing oil and gas partnerships were the hot-ticket investments. If you even said the word “stocks,” “bonds” or “mutual funds” to investors, they would have turned and ran. In March 2009, the push was government bond funds and CDs, and the insurance companies were selling fixed annuities – but most people were already savvy due to the collapse of AIG. What I did learn was, based on all the phone calls from clients, that we may have not educated and prepared all of our clients as well as we should have.

While we consistently write about volatility as a side-effect of any long-term strategy, no one likes the downside volatility we experienced up until March 2009. It stands to reason that any person accumulating funds for a long-term need, like retirement, also needs a long-term strategy. Assets fluctuate in value, and to survive the “territory” you have to be flexible and stay the course...especially during tough climates. It is a relatively easy feat when the barrage of volatility and depression talk is not present. But realistically, that is the most important time to evaluate the path. So I learned that we need to spend more time discussing volatility, performance, and surviving and thriving as we go through the territory, especially for our new clients. In fact, we actually are going to get quite scientific about the process and are looking to partner with an Australian firm that has spent years studying and creating risk profiles for investors. The other thing I realized was that “everyone can’t manage.” Some CFAs or MBA holders might have all the training and even some experience in the field, but their skills are better for communicating, selling or writing about investing – not actually “doing it.” Suzanne Stepan and I have spent our entire careers as money managers, so our DNA is wired to make decisions.

I learned some startling information from this recent malaise. Investment advisers that pushed indexing and asset allocation were actually championing those investment strategies rather than using them as tools. Why would anyone consciously want a bunch of financial stocks in their portfolio? Or GM, AIG or other bankrupt, unethical or near bankrupt companies? Those investors seem unrealistically ignorant about owning crummy companies in crummy industries, all the while thinking that all stocks are fairly valued. The asset allocators seem equally set on the idea that to be successful or diversified you must own a little bit of everything.At the beginning of the western, the trail master went through each wagon and started throwing out all the unnecessary items – fancy dresses, shoes, a piano, heavy furniture – to ensure a faster, safer journey and to conserve space for the necessary items (like nails, pails, shovels, seeds, livestock and tools) they needed to build a new life. A portfolio that is weighted down by a bunch of retailers, financials and highly leveraged, poorly managed companies is going to have a hard time making it through the territory.

A few years ago my family went on an adventure to the Galapagos Islands. Darwin’s theories had their genesis in the Galapagos, and I will leave this essay with a quote from Darwin. “Nature teaches us that it is not the strongest of the species that survives. It is the one that is the most adaptable to change.” Getting through the territory will take intellect and strength of character, but these qualities will have little value if they are not combined with flexibility.

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