ESSAYS

7 Secrets for Investment Success at MWS Capital Back to Main


1. Optimism: The definition of investment is putting money into something with the expectation of a profit. It implies a positive perspective of an investment, and often the market as a whole. Financial theory notes that we assume some risk of loss and variation in the value of our investment in our quest for profit. But risk expressed in modern portfolio theory must not bar the optimism that our investments will reward our confidence and financial analysis over time. Without optimism investment is impossible.

MWS Capitalís core philosophy is that all investment returns-stock or bond- spring from the inherently positive inertia of modern capitalist economies. People who are always negative may be momentarily correct about market swings, but they can never capture the leveraged profit of consistent long term investment. As a testament to my theory and practice, our client accounts are at all time highs after the worst financial crisis since the period of high inflation in the early eighties. Pessimists also have the false belief that investment returns comes from day to day trading on Wall Street, or the prepackaged financial goods sold by financial agents, instead of the ownership in real stakes in the economy that are the core of MWS Capital portfolios.

Looking forward- there are clear signs of strong industrial reemployment, a big rebound in consumer spending, and leadership in key components of the economy- oil, autos, steel, technology and rebounding credit. I believe these are signals of a big bull market at hand.

2. Quality: I am not optimistic about the market for junk. With my experience as a trader I see many investment ideas that people believe are legitimate- Penny stocks- options on commodities, currency speculation, trading schemes, or even just third tier companies with limited resources, markets and products. Real investing is in real companies that have large markets and substantial revenues and profits from well known products that sell in competitive markets. Yes, some companies will end up being better than others as investments, so even as a gemologist can asses the quality of a stone, he cannot predict with certainty its value in an auction many years later. But we must make our best choice for quality and value and be confident the market will reward our choices. Some companies do fall on hard times despite their best efforts, or as we saw in the Financial Crisis, their worst. That is where with a focus on quality and our eye for a turnaround we can find some bargains.

3. Diversification: The most important aspect of actual investing is high diversification. Not 5 stocks, but 20 to 50 or more. The business of a professional manager is to keep track of his clientís holdings, so it is not too many. Stocks are highly correlated to each other, and it takes a large number of stocks to get the right mix of companies for a robust representation of economy as a whole. There are about 5000 US stocks so 50 is still a focused representation of the market. When it comes to mutual funds, think about diversification in another way- each fund is diversified in itself, but each still represents a distinct security and market sector, so variation in a fund portfolio- say 5-7 funds is important. I have heard arguments that too many stocks- say over 20 means a manager hides behind diversification. Nothing is further from the truth; stock returns by definition cannot be fathomed, so even the best financial analyst would be both irrational and ignoring financial theory if he were to advise his clients into a few stocks. Finally, higher diversification allows the magic of appreciation where the big winners can double and triple as their size is still appropriate to the overall portfolio. Letting the big winners win is behind MWS Capitalís successful results.

4. Fixed Income: Fixed income is a hallmark of our investing and the most crucial tool of risk reduction in a portfolio. Stocks are stocks, so whether in funds or in a pro mix that we use, they go up and down, pay about 2% dividend, but you never know when they will actually deliver that long term appreciation due by financial law. In the meantime, there can be dramatic selloffs like we have experienced over the past years. The only protection against this is to have the right amount of cash, notes, and bonds in a portfolio to moderate a decline in the investment market. The tradeoff of bonds versus stocks is that bonds give up return for the certainty of principal and reduction of the swings in stock accounts. Some clients need lots of notes and bonds because they cannot bear the fluctuations of stocks. But with the right choices fixed income investors can get plenty of return without the ups and downs.

5. US Centric: As opposed to the recent fashion of making big investments overseas, I have always pursued a US centric strategy. I hold foreign stocks and funds of courseó especially Canadian. And US blue chips that are the core of our portfolios have big business and revenue overseas. But at the end of the day we must invest locally. At the height of the Euro craze a guy stopped into my local bank and asked for Euros- just to have-without interest! We have a sound local currency, even if it tends to depreciate against overseas countries that pursue exporting warfare as an economic development strategy. But the historical depreciation of the dollar has nothing to do with the returns in your Fidelity accounts. US markets, companies, people and government are more trustworthy and I have a deep responsibility to your funds.

6. Invest for prudence and permanence: I avoid flashy investments and prefer companies with long business histories that may actually be somewhat boring. That does not mean we do not own Apple or Amazon, we are not blind to current trends, but the base of a portfolio must be well established core holdings of stock and bonds. My primary fiduciary duty to my clients is to invest with prudence and permanence. I am seeking long term stakes in profitable companies, and in the investment market as a whole.

7. …lan!-Fashion your portfolio with interest and focus. Prudence and permanence does not mean boring or a portfolio without focus or emphasis on certain market sectors that will benefit my clients. While prudence rules, it is also crucially important to find interesting investments for my clients. MWS Capital composes portfolios with stability, value and dividends, but also carefully fashioned with the lively potential to capitalize on rising markets.


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