Woodstock Quarterly Newsletter / Q2 2019
As with many debates, the argument over “active” versus “passive” investing seems too simple. We’d actually like to highlight three investment categories, delineated by expected return. We think that we are the middle category of “passive” investors “actively” picking stocks.
The first category of “active”, or activist, investors want to be involved in running companies. Company presidents may do the work in these investments, but the “executive chairman” directs the show. These “chairman” range from private equity pre-IPO investors, to hedge funds controlling through purchased debt to Warren Buffett’s smaller investments. They are willing to take extra risk for a return expectation here, we would assume, of about 18% per year. The trouble starts when these activist investors believe that their financial acumen allows them to successfully operate in any industry. Many industries are exceedingly complex and the visible part of the iceberg, or industry, is probably the only part describable solely by financial analysis. Also, the results rarely approach the 18% per year expectation, which such concentrated risk acceptance would dictate.
In the middle category, at Woodstock, we’re picking strong companies with capable managements in industries that we believe present good growth opportunities. Our return expectation is 8% per year, the historic equity-like return. We help our clients devise asset allocation and investment strategies and to maintain them under tumultuous market conditions. Besides generating an equity-like return for the equity portion of the portfolio, an individually managed account allows the portfolio manager to reduce costs by paying attention to taxes and by avoiding pooled investment vehicle fees.
The last category is passive investors passively picking. There are very few in this category who put 100% of investable assets in an S&P500 index fund, or even 80%. The advice from Warren Buffett, or Charles Ellis or Jason Zweig is that the average investor should buy index funds.[1] “If you’re rich, you can buy a lot of things, but on average you can’t buy above-average performance.”[2] However, as the typical diversification of passive investing progresses, i.e. as more index funds are picked to “round out” a portfolio, the number of stocks involved escalates into the thousands, the investment themes are in the hundreds and the return expectation is diluted to an enhanced bond return of 5%, or 1% over the historic 4% return for bonds.[3]
At Woodstock we operate right where we would like to be: 1. not too smart by half and 2. not dumb money; we’re passive investors investing actively. Over time we expect an equity-like return. We seek to participate in broad economic trends alongside proven management teams over multi-year periods. And over time, we expect to be the better choice than either of the other two for the overarching reasons that draw discerning investors to the investment world.[4]
We wish that 2018 had ended with the S&P500 in positive territory. However, with dividends reinvested, it ended down 4.38%. The good news for Woodstock clients is that all seven investment managers here beat that return by more than 100 basis points, or 1%. We work hard to provide the service that our clients expect and it is very gratifying when those services include outstanding investment returns.
We know that you are the most valuable business development tool that we have. Your referral of a friend, colleague or family member to us is the most important way that we grow.
We thank you for your support and want you to know that we are dedicated to serving your best interest.
William H. Darling, Chairman & President and Adrian G. Davies, Executive Vice President
[1] Charles Ellis, Winning the Losers’ Game, 2013
[2] Quote Warren Buffett, WSJ, 12/22-23/2018 Jason Zweig
[3] Ask your portfolio manager for the reference.
[4] “reasons”: create and preserve wealth, and comfort and confidence in the investment process