If you’ve made it through our first two posts on this topic, you’ve learned:
- ALL investing decisions are “active.”
- However, the active mutual fund industry doesn’t get the best investment returns for individual investors because it wasn’t designed for that. As David Swensen, the prior chief investment officer at Yale, said: “ The mutual fund industry is not an investment management industry. It’s a marketing industry.”[1]
In this post, we’ll discuss:
- What do we believe is the best way to build wealth?
- What does our team do differently to pursue that?
#1 We believe (and history’s on our side here) that the best way to build wealth over the long haul is to own a productive business—one that makes their customers better off and has a long-term mindset.
What makes an investment more likely to be successful or not? That’s what we think is the fun part of investing—tilting the odds in our favor for a successful investment outcome. We like this topic so much that we wrote a dedicated post, which you can read HERE. In short, there are characteristics we look for (and avoid) in pursuit of a better investment outcome for you. We’re actively deciding what businesses to own and those to avoid.
For example, we’ll pick on our longest-held investment, Nike, which has been in our portfolio for two decades. Now, Nike stock has done better than the market about two-thirds of the time, but there were plenty of years we felt “dumb” as owners. We can count 2023 in those years—Nike stock declined while the overall market was up. There have even been three years when the stock price declined by ~20% or more. However, we’re hard-pressed to believe that the value of Nike’s business declined that much since its profits continued to grow and do well for its owners. The graph on the left shows that returns by year look like noise. Sometimes, Nike stock does well, and sometimes it doesn’t. However, the graph on the right shows that $1 invested in Nike two decades ago (when we initially purchased) is worth $25 today versus just $8 if invested during the same period in the S&P 500. That’s a huge difference, and 25 times one’s original investment is a sizeable investment return!
Of course, not every investment we’ve made or will make works out that way, but it does show that even good investments aren’t always good. Sometimes patience is required, and we all must zoom out to focus on the big picture. Daily, weekly, and monthly stock price moves are often more distracting than helpful.
#2 We built a firm that we would want to work with (if we were clients)
When we launched JSA, we asked ourselves one simple question: “As industry veterans, knowing what we know, what kind of firm would WE want to work with?” And then we built it. Here are just a few things we do differently.
- We invest alongside our clients.
We think and act as if your money is our own. We’re in the same boat as you and will endure losses and enjoy gains right alongside you. We are the portfolio managers, too, so you have direct access to the decision-makers. This is an important piece of our investment philosophy–we are in this together!
- We are long-term investors.
We’ve held our average stock for five years versus two years for the industry. We get to know our companies and their industries and evaluate the people in charge. Do not expect us to trade frequently. If our work is correct, we’ll own companies for many years. We will be wrong sometimes, too, in which case you would probably see us “sell faster.”
- We believe focusing on our best ideas improves performance.
We aim to identify and own “excellence” and avoid “mediocrity.” We construct portfolios of 20-30 reasonably priced stocks of businesses that are responsible, well-managed, competitively advantaged, participate in attractive industries, and don’t take on too much debt.
- We invest in companies we’re proud to own
We believe this helps us act with confidence during times of difficulty and avoid costly situations for shareholders. That assessment includes things like:
- Does the company conduct business in an environmentally and socially responsible manner?
- Are employees motivated, engaged, and empowered? Are they treated fairly?
- Does society benefit from what this organization does?
- Are customers happy to do business with the company?
- When things get tough, do we believe the organization is doing the right thing?
Conclusion
If these beliefs interest you, please contact our team to schedule a time to discuss your financial life. We offer complimentary (no obligation) meetings where we gather information to help you develop a Money Mission Plan detailing where you are and where you want to go. We look forward to meeting you!
Read the Value of ACTIVE Investment Management – Full Series
