18th century Irish clergyman and writer Philip Skelton wisely said:
“Our principles are the springs of our actions; our actions, the springs of our happiness or misery. Too much care, therefore, cannot be taken in forming our principles.”
We could not agree more. Whether it is how we choose our friends, our partners, our co-workers or how we take care of ourselves, having principles and sticking to them as best we can is a key driver of “our happiness or misery”.
Prime Quadrant’s investment principles are based on our observations of what has worked for the most successful investors, adapted to meet the unique needs of affluent families fortunate to have “institutional” amounts of capital.
Several approaches to protecting and growing wealth can be successful. There is no monopoly on investment knowledge, and we have seen firsthand that different paths can lead to great results. Thankfully, investment success does not require a perfect approach. Though, having clear principles sure helps!
Keeping one’s investment principles top of mind helps avoid reactive decisions while shedding light on what is likely to be the best decision or path – regardless of the everchanging environment.
Prime Quadrant’s Investment Principles are grounded on five pillars:
1. Use a Total Portfolio Approach
• Avoid the “bag-of-bets” approach by giving each investment a job description in the portfolio
• Incorporate different asset classes to improve results and reduce uncertainty
• Diversify within the asset classes, while avoiding over-diversification
• Manage return and risk based on your personal goals and aspirations rather than the market
2. Have a Risk-First Mindset
• Use inversion thinking to help spot possible errors and issues*
• Do everything you can to avoid permanent losses
• Risk is not the same for all people, and volatility is not the same as risk
• Always maintain a margin of safety
3. Take a Long-Term View
• Recognize that even the best ideas will not work all the time and process drives results. Short term results should not drive process
• Be willing to look foolish by the consensus view if you believe your thesis has merit
• Prioritize asset allocation and manager selection over market timing
• Valuation may not matter in the short term, though it matters a great deal in the long term
• Embrace some illiquidity and demand a premium for doing so
4. Acknowledge Personal Biases
• Perpetual learning is the cornerstone of investing. Regularly challenge your perspective
• Do not follow the “herd”
• Stories are not facts
• Measure what matters and focus on what you can control
5. Think Like a Business Owner
• Seek out relationships with shared values, optimal alignment and exceptional talent (especially in less efficient markets)
• Avoid a “career risk” mindset and embrace complexity when appropriate
• Be aware of the academic theory but temper with “boots on the ground”
• Do not settle for what is convenient at the expense of what is best in class
• Manage costs and always focus on value
In upcoming posts, we will dive into each of these principles.
In the meantime, we hope this inspires your thinking about your own investment principles and that this contributes to better investment decisions.
*Inversion is a way of thinking about what you want to achieve in reverse. So instead of thinking about what you need to do to get what you want (i.e. thinking forward), you invert your thinking by focusing on what you don’t want to happen (i.e. thinking backwards). See https://fs.blog/2013/10/inversion/ for more on this idea.
By: Terry Vaughan