Investment Philosophy

Active vs. Passive

cak close up iiWe believe timing matters. The key to solid long-term returns is to know when to apply the principles of passive investing, also known as Modern Portfolio Theory (MPT), and when to apply the principles of active investment management.

During periods of economic expansion, the principles of MPT are valuable in helping investors diversify away market risk. By investing broadly across all sectors of the stock market, investors can take advantage of the market’s “rising tide.” This is when performance is heavily influenced by asset allocation across all sectors.

During times of economic weakness, the principles of MPT fall short of hedging investors against market risk. We do not believe it makes sense to apply the broad-market approach of MPT at a time when more sectors of the economy are weak than strong. While the principle of diversification is sound, it should not be applied broadly during these periods.

Instead, we believe it is important to identify the strongest sectors to invest in while avoiding completely those that are weak. Our research suggests that diversification that is too universally applied can increase market risk. This is when we use an active approach to investing.

Although past performance does not guarantee future results, history suggests that the stock market moves between periods of growth and consolidation that last approximately seventeen years. It is this alternating move between growth and consolidation that leads to investor confusion and frustration.

We believe that by applying the strengths of these philosophically opposed strategies at the appropriate time, investors will be in a strong position to generate superior long-term returns.

Long Term Market Cycle

The view that investment performance is tied to the timing of when to implement an active or passive investment discipline is central to our investment strategy.

The chart below illustrates how consistently the cycle has alternated between “bear” (flat) and “bull” (rising) markets. The numbers in green indicate the level of the Dow Jones Industrial Average at the end of each seventeen year period.

Chart033117(2) (2)

Source:  Dow Jones Indexes.   The Dow Jones Industrial Average is an unmanaged index of thirty widely held stocks. You cannot invest directly in any index. Past performance does not guarantee future results.

Investment Process

Our process utilizes a “top-down” approach to manage client portfolios. We begin by conducting a sector analysis of the market to determine where we believe economic strength lies. This is an important first step in the process and sets the stage for the construction of the portfolios. Once we have determined which sectors will provide the strongest opportunity for performance, we set about to find the “best-of-breed” companies within these sectors.

In the second stage of the process, our analysis becomes more refined. To help us find the strongest investment candidates, we utilize a wide array of resources which include Morningstar®, Value Line® and Standard & Poor’s® research.

After a stock or bond has been purchased, we monitor its performance closely. We continue to evaluate whether it is still a “best-of-breed” company within the sector.

We spend a lot of time analyzing and monitoring the individual companies in the portfolio. It is with even more emphasis that we monitor the portfolio’s asset allocation and macro-economic environment. If our analysis suggests a significant move in the broader market is possible then we will take steps to either increase or decrease the portfolio’s exposure to it. There are times when we believe holding cash instead of stocks/bonds will help to protect against downside risk.

High quality stocks and bonds form the building blocks for every portfolio. During times of economic weakness it is the quality companies that endure. We believe chasing performance by compromising on quality increases risk while maintaining a focus on quality lessens volatility.

Long Term View
History may not repeat itself but we believe long-term market cycles exist which guide our asset allocation model. Recognizing historic market cycles that share characteristics with the current environment can help us hedge against downside risk and increase the opportunity to generate solid returns.

Buy Discipline

illustration_buy_disciplineFinding Portfolio Candidates
Beginning with an assessment of where the market is positioned along the Long-term Market Cycle timeline, we generate a list of sectors which we believe are poised to generate strong absolute returns. We use resources such as Morningstar®, Value Line®, and Standard & Poor’s® to help with identifying portfolio candidates.

Evaluating Portfolio Candidates
A consistent process of monitoring portfolio holdings is in place to ensure compliance with the buy and sell discipline.

Sell Discipline

illustration_sell_disciplineAdhering to a sell discipline is essential to delivering superior investment results. We have identified four events which will trigger the sale of a portfolio holding. They are:

 – Stock has declined 30% from initial purchase price

– Price target has been attained

– Initial thesis for owning the stock has begun to break down

– Dividend is cut

More Info

Whether you are an existing client or simply have questions about our firm, we would be delighted to speak with you. Call or email our team at any time.


8:00 - 5:00pm, Monday through Friday

Get Current Investment News

Sign up for our free newsletter to receive tips, opinions and research to all things investment.

Building your future is just a call away.