Philosophy

The core of our philosophy is to tailor the investment management to each individual client, however, the following published article will give you an excellent idea of our overall approach.

SOCRATES, THE RISK FREE RATE, AND CRAMER�S MAD MONEY �by Michael Tcheyan, CPA, CFP

Few people know that Socrates was one of the world�s first successful investors.  Prior to Socrates, most great fortunes were made through the use of force: via taxation from a monarchy, through the use of church sponsored frauds such as sales of absolution from sin, or brute force and criminal activity including usury.  None of this involved the use of strategy to achieve higher future returns. 

Today, the strategy used by Socrates would be deemed illegal under our anti-monopoly laws, but it was nonetheless brilliant.  By striking long-term (one year in those days) rental deals during the winter with the owners of olive presses in Greece, Socrates initially was thought to have lost his senses.  However, when summer came and he was able to charge exorbitant rates (he controlled all the presses and the olives would spoil if not quickly converted to oil) he made a fortune and changed the course of investment strategy and business.

Not all of us have the brilliance of Socrates (or Cramer and other stock pickers with similar track records).  But a great feature about our modern world of investment is that you don�t have to be brilliant to earn great investment returns.  In fact, free � or nearly free � access to capital market returns is probably one of the most democratic and accessible freedoms of today�s world.   And these wonderful returns can be in the 9% to 13% range - with consistency and without much worry - if approached with the correct strategy.

The fact that many people don�t earn returns in the 9% to 13% range is due to two things:  First, the volatility inherent in short term returns can make it emotionally difficult to stick with a strategy.  The fear that a company will go bankrupt - and you had better save what you have before you lose more - can be very compelling. 

Second, the financial media�s focus on security selection and market timing further complicates the effort to stick with asset class over stock selection.  The reason for this is that picking stocks and rapid trading has more sex appeal and sells more newspapers.  That is why it is critically important to realize that the financial media does not have your best interests at heart.  What they are interested in doing is selling advertising.

On the other hand the �practically guaranteed� long-term returns are only available by investing in the asset class as a whole while avoiding individual stocks.  Simply stated this is because individual companies can go bankrupt while an asset class cannot.    By eliminating the potential for total loss, you have the peace of mind to await the long term returns the asset class as a whole will earn.  Greater risk for greater returns sells more newspapers but only if you don�t mention the potential for greater loss.

First decide what level of returns you seek (or what level of volatility you can live with).   You can choose one but not the other since each asset class has its own long-term return and associated volatility.  These returns have been shone to be consistent over 15-20 year periods so assume a 10 year plus holding period.  That�s why it�s sensible for young people to invest aggressively.  For a more balanced strategy do the following:

1.         Allocate to the risk free rate based on your tolerance for volatility. 

2.         Invest in all quality asset classes.  Don�t worry about whether a particular asset class is temporarily in a bull or bear market. 

3.         To further increase returns invest with Dimensional Fund Advisors (www.dfaus.com).  This firm, founded in 1984, has asset class portfolios that have exceeded by 1% to 2.5% the returns available from an index approach. 

4.         Re-balance your portfolio via �regression to the means� (which is different from market timing) for another 2% to 4%.

5.         At this point you have reached the limits of �strategic� investing.  In order to earn further returns �tactical� techniques such as stock picking and market timing are necessary.  This is where professionals like Cramer and others excel.  However, as acknowledged, it�s for your �mad money� only. 

In summary, the biggest obstacle to earning excellent and consistent returns is the emotional element that comes with volatility. To avoid this accept that you are human.  Construct your portfolio based on items 1 through 5 above and earn the great returns that the market gives away for free if you play by its rules

Michael Tcheyan is the founder of Investment Strategy Advisors Inc., a fee based, SEC registered advisor located in Summit, NJ.  The author wishes to credit Ibbotsen Associates, GMO LLC, Efficient Frontier Advisors, RealMoney.com, and DFA Inc. for development of the ideas discussed above. Michael welcomes your questions and comments via michael.advisor@gmail.com or 908-517-5549

Please feel free to call and speak to Michael about your personal investment objectives at (908)517-5549