Statement of principles
Fees and commissions
Established in 1992, privately owned and not associated with any bank, insurance company or investment fund manager.
PART 1 - The nature of investing
PART 2 - Setting an objective
PART 3 - Determining a strategy
PART 4 - Criteria for selecting investments
Selecting investments is a bit like buying fish. In the same way as it is impossible to tell which fish will taste best it is not possible to tell which investment is going to perform best. However, you can improve the chances of getting a good fish if you go to a shop that is clean and choose a fish that has clear eyes, moist and shiny skin, firm flesh, and most importantly the fish should not smell bad. Similarly there are criteria one can use when selecting an investment. Following are examples of the criteria we use to evaluate an investment.
Using criteria such as these will not guarantee that one selects the "best" investment, but it would seem to improve the odds of selecting good investments and this seems likely to increases the return above that which would otherwise be expected.
- Are the entry fees reasonable? (For a property this could be Stamp Duty, for shares it could be brokerage, for a managed fund it could be entry fees, for buying a business or franchise there would be other legal and establishment costs.)
- Are the exit fees reasonable? (For a property this could be Agent's fees, for shares it could be brokerage, for a managed fund there are usually no exit fees.
- Are there any costs, penalties, fees, etc. if the investment is sold within a certain period?
- Are ongoing costs reasonable?
- Is it possible to sell the investment promptly?
- Are there constraints on selling the investment?
- Do I understand what the manager actually does with the money?
- Am I comfortable with the strategy?
- Is the investment geared?
- Economies of scale
- Does the investment already have in excess of $100m?
- Track record of manager
- Does the manager have a good track record of at least 5 years doing what it proposes to do?
- Does the past performance data seem consistent with the nature of the investment - sometimes there are blips in the data which lift the long term performance, but which give rise to questions as to what created the blip and whether the long term performance data is meaningful.
- Potential for conflict of interest
- Does the manager of the investment have any conflicts of interest (e.g. related party transactions)
- Is this investment expected to earn more than similar investments?
- Is there sound reason for believing this investment will perform better than similar investments?
- Is this investment likely to be less volatile than similar investment?
- Is the return likely to be more predictable than similar investments?
- Is the likelihood of collapse less likely than Adsteam, Estate Mortgage, Pyramid Building Society, Tricontinental, Westmex, Barings Bank, General Motors Corporation, Westpoint, Storm Financial, etc.
- Does it seem too good to be true?
- Eggs in basket
- What would be a reasonable exposure to this investment?
- If the investment is guaranteed how good is the Guarantee?
- If the investment fails what is the likely capacity of the guarantor to honour its guarantee?
- What is the true nature of the guarantee?
- Are you locked in for a period of time?
- Under what circumstances could you lose money?
- How much could you lose?
- Conservative, capital stable, capital secure, etc.
- If the investment is described as conservative, capital stable, capital secure, or other such term what does this really mean?
- Does it mean your money is really safe?
- Is your purchasing power safe?
- What is there about the investment that makes it "safe"?
- Is there anything that prevents it from losing money?
- How much could it lose?
- Capacity of the manager
- Does the manager have the financial and other resources to perform its function.
- Smell test
- Does it "smell"? Most investments don't smell at all as their brochures, product disclosure statements, and other marketing material has been carefully crafted by experts in compliance law and marketing. However, sometimes one gets a whiff of an odour.
- Odour may arise from things that are said and things that are not said. To detect the odour one needs to read between the lines and be alert to the subtle warning signs. One such warning sign is vagueness. For example, statements like the following create an odour: "This fund invests in mortgage backed securities and other assets". What are the "other" assets? What proportion of the investment can be expected to be invested in "other" assets? Are there limits on the exposure to other assets? What controls are in place to ensure assets that the exposure to "other" assets is appropriate. Another warning sign is when common words are given unusual definitions. The astute reader may also find warnings in reports by "experts" and "independent researchers" which at face value provide positive comment, but which seem carefully worded to cover the backside of the expert or researcher more than usual.
- Is the seller given an outrageous incentive to sell the product?
- Is the product being marketed to people from out of town who really do not know the local values? (e.g. local properties being marketed to tourists)
- Are high pressure sales techniques used?
In statistical terms, our approach is intended to raise the mean return and lower the standard deviation of returns. That is, a better expected outcome with less uncertainty.