Statement of principles





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Investment philosophy


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Established in 1992, privately owned and not associated with any bank, insurance company or investment fund manager.



Investment philosophy

PART 1 - The nature of investing
PART 2 - Setting an objective
PART 3 - Determining a strategy
PART 4 - Criteria for selecting investments

Our strategy for achieving the objective is essentially one of being prepared for uncertainty. This is very different to trying to predict the future and it is based on the belief that the investment markets are sufficiently efficient that it is not possible for anyone to reliably out-guess the market.

This is a very contentious issue. Many people hold the contrary view that there is opportunity for those with the expertise, talent, resources, etc. to take advantage of these market mispricing.

It is impossible to prove who is right.

  • Some people do seem have an uncanny knack for being in the right place at the right time, but it is this the result of luck or skill?
  • Is it reasonable to extrapolate a person's past results when history shows that whizz-kid managers and entrepreneurs come and go?
  • In order to take advantage of any market mispricing one must reach a conclusion faster than the rest of the market because unless the rest of the market eventually reaches the same conclusion the price will not move the way one expects. Is it realistic to believe that anyone has such an advantage over the rest of the world?
  • Even if it were possible for some people to reach a conclusion faster than others their buying/selling would tend to drive the price towards what they believed was the correct price such that any mispricing would be very small and temporary. If it were possible to make good profits from such inefficiencies in the market surely the actively traded funds would perform better than they do?

Much as we would like to be able to claim that we have a crystal ball, or an economic model, or a forecasting methodology that would enable us to profit from inefficiencies in the market we recognise our limitations - and those of others.

Our strategy for achieving the objective of avoiding a financial disaster and obtaining a reasonable return involves:

  • determining an appropriate investment strategy;
  • managing risk by designing a portfolio that is appropriately diversified, and
  • selecting appropriate investments.

For example, in determining an appropriate investment strategy we would not only consider the client's objectives, their financial situation and their needs, but we would also consider issues such as:

  • the relative merit of investing internationally (e.g. globally, specific regions, developing countries, etc.)
  • the relative merit of different asset classes (e.g. shares, property, fixed interest, collectables, commodities, precious metals, etc.)
  • the relative merits of sector specific funds versus balanced funds;
  • the current tax advantages of superannuation versus the ongoing legislative risk associated with the superannuation environment;
  • the potential to earn more by borrowing money for investment versus the risk associated with borrowing money;
  • the merits of a "buy and hold" approach versus trading;
  • the advantages and disadvantages of owning an investment property;
  • whether it is better to own investments such as shares directly via managed funds;
  • whether index funds are better than managed funds; and
  • whether it is better to ride an investment through the ups and downs of the market or try to buy at the bottom of the market and sell at the top.

In managing risk we would consider the extent to which each of the following forms of diversification should be used:

  • asset class
  • manager
  • legislation
  • geographic region
  • time
(These forms of diversification were discussed in 1988 by Paul Gerrard, a founding and current director of APT Strategy, in an article titled "Diversification - a risk reduction strategy. Copy of article)

The significance of diversification may also be examined via statistical theory, past data, and random walk simulations. Such examination can help to address questions such as:

  • What is a reasonable exposure to a specific investment?
  • How many shares would one need in a portfolio in order to reduce the "unsystematic risk" to a reasonable level?
  • Is it better to try to pick the "best" investment or several "good" investments?

Continue to PART 4 - Criteria for selecting investments