We Sleep Better at Night With Our High Margins of Safety
When we prepare a financial plan for our clients, we are required to look out many years in the future. Even clients who are already retired may require their incomes to last (and to grow) for another 20 or 30 years – or longer in some cases. Nobody comes to us with an expiration date!
Because it is impossible for us (or anyone else) to know the unknowable, we must make reasonable assumptions about the future – knowing full well that we do not know exactly what the stock market will do one year to the next, what inflation rates will be, and how long each client will spend in retirement. What we feel is most often overlooked is the fact that the longer we live, the more important it becomes to protect ourselves from inflation.
So when we prepare a comprehensive retirement plan for our clients – we always build a high margin of safety into all of our assumptions. Because of our disciplined approach to investing, we have achieved very pleasing outcomes for our clients. That being said, we always use conservative assumptions in our financial plans, with the aim of over-delivering for our clients.
We underestimate what our growth rates will be. We overestimate what inflation will be. We also want to prepare our clients for a long retirement & therefore we overestimate longevity in our financial plans. At every level, we build in these ‘margins of safety’. That way, our plans can better withstand the perils of the unknown. This practice has worked very well for us and for all of our long term clients.
To further protect our clients from the uncertainty of future events we always adhere to the principle of disciplined diversification. The concept of proper diversification is much easier to conceptualize in theory than it is to accomplish in practice for the average investor.
It is all too easy to chase yesterday’s winners – everybody wants to own the most exciting companies that are (at the moment) loved by all the talking heads on financial news networks and advertised non-stop by marketing led fund companies. They don’t always ask “is this product good for the client?” Instead, they ask “will it sell?”
Think back as long as you like….dot com stocks in early 2000. Income trusts in Canada were all the rage up until October of 2006. (ouch!) Or energy stocks… up until 2015. Cannabis stocks were smoking hot… until very recently…you get the point. Trend chasers tend to overweight very expensive stocks, many of which may have little or even no earnings. We, along with our managers, steer our clients clear of this very dangerous tendency to follow the herd.
While we do align our clients with world-class growth managers who intelligently build positions in some of the more exciting companies who may be on the cutting edge of technology, we always maintain a disciplined practice. We diversify our growth mandates with world-class value mandates who will focus on very cheap, unloved companies – which tend to be overlooked, or forgotten. As one of our favorite value managers once told us “You can’t hurt yourself too badly by falling from a basement window”
In addition to style diversification, we always maintain a global focus in all of our client portfolios. We want to be able to invest in the best businesses anywhere – regardless of geography. (The best ideas are never just in one country)
For patient investors, this disciplined diversification has produced very pleasing returns long term returns, and at the same time, it has protected our clients during more difficult markets. All of our experience has shown us that diversification is the only “free lunch” in investing.