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The Third Pig

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Frequently Asked Questions

In an updated version of Benjamin Graham’s The Intelligent Investor, Money magazine’s senior writer Jason Zweig adds a modern twist to this investment classic. In this updated version, and reprinted here for your convenience in a Time magazine article, Zweig offers advice on the questions to ask a potential financial advisor.

  • Why are you in this business? >>

  • What is the mission statement of your firm? >>

  • What is your investing philosophy? >>

  • Do you use stocks or mutual funds? >>

  • Do you use technical analysis? Do you use market timing? >>

  • Do you focus solely on asset management, or do you also advise on taxes, estate and retirement planning, budgeting and debt management, and insurance? >>

  • How do your education, experience and credentials qualify you to give advice in those areas? >>

  • How do you choose investments? >>

  • What investing approach do you believe is most successful? >>

  • What evidence can you offer that you have achieved success for your clients? >>

  • What do you do when an investment performs poorly for an entire year? >>

  • Do you, when recommending investments, accept any compensation from any third party? Why or why not? Under which circumstances? >>

  • How much do you estimate I would pay for your services the first year? What would make that number go up or down over time? >>

  • May I see a sample account statement? >>

  • Do you consider yourself financially successful? Why? How do you define financial success? >>

  • How high an average annual return do you think is feasible on my investments? >>

  • Will you provide me with your resume, your Form ADV and at least three references? >>

  • Have you ever had a formal complaint filed against you? Why did the last client who fired you do so? >>


Why are you in this business?

 

As human beings, there are certain priorities more important to us than investment performance, but once we secure good health and the safety of the people that we love, there are few things as important to our security and well-being as the ability to preserve and grow our hard earned savings. We want to help in this regard.

 

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What is the mission statement of your firm?

 

Our Mission is borne from our Vision of how we think the world should be. Our Vision is of a world where prosperity is better shared, where there is genuine equality of opportunity, where concentrated money ceases to dominate and where all of our human resources are allowed to germinate and grow. In short, our Vision is the democratization of wealth opportunity. In order to realize our Vision, our Mission is to:

  • strive to be an open-source, world-class value investment firm
  • challenge exclusionary practices that work to undermine wealth opportunity
  • operate as an advocate for investor rights and education.

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What is your investing philosophy?

 

The three points of our investment philosophy are value, quality companies, and long-term focus.

Value: We believe in the philosophy of investing espoused by Benjamin Graham & David Dodd in their 1934 classic Security Analysis. In other words, we are value investors. We always attempt to estimate the intrinsic value of a company and once established, invest when the current market price of the company is well below our value estimate.

Quality: We look for great businesses with leading market share, franchise value, strong niche markets, pricing power and high barriers to entry. Healthy balance sheets, stable and improving margins, and high levels of free cash flow are also priorities. We look for strong management that has an equity stake in the company and that allocates capital prudently. Businesses with these characteristics are able to grow their intrinsic value over time, and these are the companies in which we are interested.

Long-Term Focus: We believe that, over long periods of time, the price of a stock will rise to reflect the value of the underlying company. As the economic value of the company grows, eventually, so will its market price. As Benjamin Graham said, “In the short run the stock market is a voting machine, but in the long it is a weighing machine.” To that end, our view is toward the long term.

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Do you use stocks or mutual funds?

 

There are several reasons that we prefer direct investment in stocks to investment in mutual funds. Among those reasons are our bias toward running relatively concentrated portfolios, the disappointing record of many actively managed mutual funds and the total costs of participating in mutual funds.

Holding a smaller number of stocks in a portfolio (10-35 stocks, for example, rather than 100-150 like most mutual funds) is important to our investment philosophy. By building focused portfolios, our best ideas can have a meaningful impact on investment performance. Evidence suggests that concentrated portfolios lead to superior long term investment performance. Holding an excessive amount of securities will lead to, at best, average performance. We think it does not take much talent to be average. In the words of Warren Buffett, “One can learn to be average in 5th grade.”

In Berkshire Hathaway’s 1993 annual letter, Warren Buffett elaborated on his preference for owning just a handful of stocks:

“The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.”

Most mutual funds are highly, if not overly diversified. The managers of these funds also trade their stock holdings with frequency which adds to trading fees, opportunity cost and capital gains taxes. We can point to many studies which all lead to one inconvenient truth - in any one year, anywhere from 45% to 55% of mutual funds outperform the market index before costs are considered and less than 20% outperform the market once costs are included. When longer periods are considered, fewer and fewer funds exhibit the ability to beat the index. Studies show in periods of 20-years or more and accounting for all the costs and fees associated with mutual fund ownership, it is likely that less than 1% of all funds would have beaten the market or a market index fund.

In summary, except in rare circumstances, we avoid mutual funds as they are expensive, have a history of underperforming the market and are too diversified for our taste.

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Do you use technical analysis? Do you use market timing?

 

We are not chartists and we do not time the market. We find marginal use for technical analysis and market timing has proved impossible.

We do however consider factors related to a company’s earnings, sales, cash flow growth, and stock price momentum. We believe that these factors are best classified as fundamental analysis as they require study of a company’s underlying economic performance, and not chart reading.

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Do you focus solely on asset management, or do you also advise on taxes, estate and retirement planning, budgeting and debt management, and insurance?

 

We will not attempt to become experts in every financial discipline. This is an impossible achievement and if attempted, would be a waste of precious time. We concentrate on the management and investment of your assets.

Under limited circumstances we can provide a client with a personal financial workup. However, in more complicated situations we will introduce clients to third party firms that may be better suited to serve the financial planning and wealth management needs of our clients.

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How do your education, experience and credentials qualify you to give advice in those areas?

 

Like many of the best investors of our time, we have learned much of what we know from studying the writings and opinions of those well versed on business and industry. The teachings of Warren Buffett and Benjamin Graham and many lesser known individuals have been instrumental shaping and enhancing our ability to analyze companies for investment.

After about a decade of broad business experience at some of the top financial services firm in the industry and success managing money for family and a few close friends from the end of 2002 to 2005, in February of 2006 Benjamin Taylor (bio) decided to turn his passion for investing into a business.

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How do you choose investments?

 

Our equity investment process is analysis-driven, employing a disciplined, bottom-up approach used to identify companies that meet our value criteria. In evaluating potential investments for each portfolio, we focus on the following characteristics:

  • A good, if not great company whose business model is understandable and whose goods or services are in high demand, but are not easily duplicated by competitors
  • A management team that is honest and forthright, has a high level of ownership in the company and demonstrates intelligent allocation of capital
  • High free cash flows, high returns on equity, and high returns on invested capital
  • A strong balance sheet with low debt levels
  • A company whose stock price is significantly lower than our estimate of underlying intrinsic value

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What investing approach do you believe is most successful?

"Confronted with a like challenge to distill the secret of sound investment into three words, we venture the following motto, Margin-of-Safety." - Benjamin Graham

We are primarily influenced by the great investment thinker Benjamin Graham. Mr. Graham was a highly respected professor of finance at Columbia Business School as well as an investment manager. Mr. Graham laid the foundation of our investment style in his seminal work, co-authored with David Dodd, Security Analysis (1934) and later with his classic text, The Intelligent Investor (1949). Graham made three immeasurable philosophical contributions to the investing world:

  1. all securities have and intrinsic value that, although impossible to precisely determine is imperative to and can be estimated,
  2. market prices of securities are subject to significant and erratic movements, which often times diverge from the securities’ intrinsic value,
  3. a “margin-of-safety” should always be established – a strategy of buying securities only when their market prices are significantly below their estimated instrinsic value will lead to superior results.

In other words, we are value investors. Mr. Graham’s investment principles have influenced today’s most successful investors, including Warren Buffett. Although this investment philosophy has been known for three quarters of a century it is practiced by very few in the investment field. As a result, the portfolio of the value investing practitioner will be contrary to the portfolio of the typical investor. This contrarian condition provides superior performance results in the long term for patient and diligent investors.

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What evidence can you offer that you have achieved success for your clients?

 

Please refer to Our Performance for how our model portfolios have performed.[1]

 

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What do you do when an investment performs poorly for an entire year?

 

It depends. What we do not do is immediately sell. The first thing we do is revisit our reasons for buying the investment in the first place. If our initial investment thesis remains, we may simply remain idle or purchase more of the stock.

Once we have identified an outstanding company and have accumulated a meaningful amount of its stock, we are reluctant to sell. We accept that during the many years we plan to hold the stock, there will be times when the price of the stock diverges from its underlying value. We might add to the position when we feel the stock is undervalued. In times when the stock is a little overvalued, we will tend to hold since selling would impose high trading costs, trigger capital gains taxes, and require an ability to time the short-term moves of a stock.

We are long term investors, however, under some circumstances it is prudent to withdraw our funds. Circumstances requiring such action include:

  • The company has reached full valuation or has reached a level where future returns would be sub-par
  • The current price multiples are well above long-term historical average multiples
  • The economics of the company are deteriorating
  • Management proves to be inept, irresponsible or unresponsive
  • We have found a superior investment alternative
  • When we have made a mistake in calculation or judgment.

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Do you, when recommending investments, accept any compensation from any third party? Why or why not? Under which circumstances?

 

We do not accept any compensation from third parties.

 

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How much do you estimate I would pay for your services the first year? What would make that number go up or down over time?

 

We are primarily compensated by taking a percentage fee of the assets we manage on your behalf. Typically, we charge a percentage in the range of 0.5% to 2.0% depending on your asset level and the type of securities we choose for your portfolio. Since we charge on a percentage basis, the level our compensation is directly linked to the level of your assets. Thus the better we do for you, the more we are compensated.

 

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May I see a sample account statement?

 

You can view a sample account statement by clicking here

 

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Do you consider yourself financially successful? Why? How do you define financial success?

In a CNBC report on Warren Buffett, aptly titled “The Billionaire Next Door”, reporter Liz Claman asked Buffett, “What advice would you give someone to help them know when they have succeeded?”

Buffett replied: “When you have people around you that you love and that love you.”

The reporter wasn’t satisfied with this answer and dug in deeper obviously looking for the quantitative means of defining success. She said, “Uh, this is a CNBC audience. Help them understand success.”

Buffett thought for only a second and said, “Doing what you love and doing it well. I’ve never found someone who was doing that that didn’t consider himself a success.”

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How high an average annual return do you think is feasible on my investments?

The following relates only the Core Model Portfolio:

As active investment managers, we aim to structure portfolios that will return more than the market. We think a realistic goal is for our portfolios to add somewhere between 4% and 7% to the market’s returns. Our long-term goal is for our portfolios to return 12% to 15%. Of course, there is no guarantee that this will occur. Our portfolios may return more or less due to many different factors. But this level of returns remains our goal.

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Will you provide me with your resume, your Form ADV and at least three references?

 

This material can be provided upon request.

 

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Have you ever had a formal complaint filed against you? Why did the last client who fired you do so?

 

There have been no formal complaints to our knowledge and no client has discontinued our relationship due to lack of service or performance. But clients will undoubtedly begin or end their relationship with Brick Financial because their goals or objectives have changed.

 

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[1] The "Core Portfolio" and the “Balanced Portfolio” returns represent the gross weighted average returns of model portfolios based on our Core and Balanced investment styles. The Balanced portfolio is made up of 40% Core portfolio, 20% Equity ETF portfolio and 40% Fixed Income ETF portfolio and is rebalanced yearly for the purposes of reporting returns. The returns are determined using a technique known as “time-weighted return on investment”. They are presented gross of fees and do not represent actual trades of client portfolios although client portfolios are based on the model portfolios. Fees range from 1% to 2% and differ from client to client. Clients may have different fee arrangements. Depending on the timing of a specific investment, actual individual returns may be lower or higher than the model portfolios. The model portfolios are presented here for informational purposes only. Although Brick Financial believes the information and data in this report were obtained from sources considered reliable and correct, their accuracy or completeness cannot be guaranteed. Neither this commentary, nor any opinions expressed herein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or other investments mentioned herein. Persons associated with this firm may own or have an interest in securities or investments mentioned in this presentation. Their positions may change from time to time and they may buy or sell such securities or investments. Past returns are no guarantee of future performance. Portfolio data is maintained at Foliofn.com. Inception date for the Core Portfolio is 12/6/2002. Inception date for the Balanced portfolio is 2/1/2006.

The index and mutual fund data comes from several sources including Wilshire, Standard and Poor’s, Hedge Fund Research, The Wall Street Journal (mutual fund data), CSRP and Barclays. The Wilshire 5000 Index is a market capitalization weighted index measuring all stocks regardless of size as long as they are traded on a major U.S. exchange. The Wilshire 4500 Index is a market capitalization weighted index measuring small and mid-cap stocks. It is constructed using the Wilshire 5000 with the companies of the S&P 500 removed. The S&P 500 Index is a market capitalization weighted index of 500 large-sized stocks. The index is designed to measure changes in the economy and is representative of most major industries. The ALL U.S. Domiciled Equity Mutual Fund and Balanced Mutual Fund data is from Lipper Research and is published in The Wall Street Journal. The HFRI Equity Hedge Index in maintained by Hedge Fund Research, Inc and is an index of Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. The Composite Balanced Index is made up of 60% CRSP US Total Market Index and 40% Barclays U.S. Aggregate Float Adjusted Index, rebalanced monthly. You cannot invest directly into an index. Index returns are presented for illustrative and comparative purposes only.

 

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