To be sure, bonds (fixed-income products) play an important role in any investment strategy, providing specific characteristics, such as predictable coupon/interest payments (usually fixed), fixed maturities and return of principal. These factors, in combination, are essential for effective financial planning and overall asset allocation. Additionally, and perhaps most importantly, bonds provide a necessary counterbalance, acting as a low-correlation asset to the higher-volatility equity portion of a portfolio.
Investors have been looking for income from alternatives to low yielding bonds since the Federal Reserve lowered the interest rates to zero after the 2008 financial crisis. This search for income in a low interest rate environment has led to a huge inflow of investment into master limited partnerships and high yield bonds over the last few years. According to the Wall Street Journal, from 2010 to 2014 a net $44 billion flowed into MLP mutual funds and exchange-traded funds. Lured by yields of 6% plus at a time where the 10 year treasury bond yields 2 percent, investors have been forced into assets that carry far more risk.
Active investors still rule the market by a wide margin. Some would like to assume they’re just throwing darts in the dark, but in reality active investors are only getting smarter and better over time as more competition enters and technology progresses. As Michael Mauboussin has postulated in his work, the paradox of skill means that as more sophisticated investors have entered the marketplace the level of outperformance will continue to narrower over time. And as skill improves, luck becomes a much bigger factor in separating the winners from the losers.
Your investments should be simple. There are thousands of employees at banks and fund companies that are dedicated to turning out new financial products to take advantage of whatever the current trend is, but those products usually are derivatives of some other security or index. Continue reading
The biggest determinant of a company’s success can be summed up by one word – people. Starting with the right management and continually hiring the best person for the position, people are what make the difference in an organization.
For example, Amazon’s culture and success has grown from an unwavering commitment to hiring only candidates that are evaluated and approved by “bar raisers,” people who are skilled evaluators of talent. If a candidate is not found who raises the bar for the organization, then the position is left open until one is found.
When evaluating investments, don’t overlook one of the most important factors in the long-term success of the company, the people.
The Toughest Clue: Management
While past history is never fully complete and never exactly mirrors current conditions, it is a somewhat helpful guide. Still, it doesn’t guarantee anything. In Jason Zweig’s new book The Devil’s Financial Dictionary, he quotes Warren Buffett, “when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”Nevertheless, we often have to make a decision as to whether the existing management can carry the company to the rosy future we would like to believe in. The attributes that we look for are:
Unquestioned integrity not only in a legal sense, but also in an intellectual sense. We need to recognize that some people lie to themselves and overstate their views of the future.
Innovation of both product and process, which are critical to long-term success.
How key executives, as well as those at the lower level, treat each other is a good clue as to how they will treat absentee owners of both debt and equity.
Good controls of people, finances, and processes will provide the everyday discipline that is critical to the success of the enterprise.