Venable Park Portfolio Management Philosophy and Approach
Until the stock market bubble burst in 2000, many investors believed that professional money managers were risk managers who moved in and out of asset markets according to market conditions and relative risk/reward assessments. “Since I am paying for professional money management”, they thought, “I assume the managers will consider the risk to my capital and take my money out of harm’s way when the risk becomes greater than any reasonable prospect of reward. After all, that’s what I pay them for.”
The hard lesson many investors have learned is that while down or “bear” markets are a regular phase of each market cycle, most managers have no pro-active systems in place to protect capital from the predictable and recurring price declines that follow.
Simply put, the investment industry is a sales-driven culture where individual investors regularly bear the brunt of poor results stemming from poor risk management.
Investment service providers typically focus more on their own scalability and asset collection goals than effective risk management for their clients. The larger a firm’s assets under management, the more difficult it is for managers to move capital in and out of various markets or holdings without moving prices with them. Out of convenience and wilful blindness, most managers have adopted an unwavering often passionate belief in passive, perpetual allocations to equities: “buy and hold”.
As shown in the chart below, remaining ‘long always’ of risk assets can work fairly well during prolonged secular bull periods (green) like world markets saw from 1920 to 1929, or from 1940 to 1965, or 1982 to 1999. However it is not helpful during the intervening long secular bear phases (red) like 1900 to 1920, 1929 to 1940, or 1966 to 1982, or the one that we are presently working through that began in 2000.
Remaining perpetually invested in equities during secular bear periods is a painful, losing strategy with low to negative cumulative returns and lots of volatility and risk. Each time markets fall, the investor’s net worth, patience and well-being plunge with them. Meanwhile, most managers and market commentators continue to insist that the losses are unexpected or unavoidable.
The problem with “long-term” time horizons
Traditional portfolio theory is premised on very long time horizons. However individual investors have finite life spans. Institutional theories of market returns over 20, 30 or 40 years are far too long to reflect the reality of most real life investors. Most investors do not have the bulk of their savings to invest until they are into their late 40’s and 50’s. By then their time horizons for real-life purposes are much shorter. As a result, controlling risk to client capital becomes of primary importance. If investors suffer large declines they can face a serious risk of not having the capital they need, even if market prices later recover.
As the past few years have amply demonstrated, passively riding out market cycles wastes precious growth time and also has a negative psychological impact. The math of loss is not kind; a loss of 50% requires a subsequent gain of 100% and usually many years to recover. Losses cause investors to question their investment approach, their holdings and their advisors. More than ever before, investors have become critical of the perceived value for management fees paid.
The Venable Park solution
To address these issues, we have developed a unique approach to manage the cost and volatility associated with investing in publicly traded markets. Our process is based on prescribed allocation rules and objective quantitative filters that help to remove the extraneous noise of personal opinion and general market speculation. It is the discipline required to capture superior cumulative returns over a full market cycle while minimizing down market losses.
To accomplish this we adhere to the following founding principles:
- We are professional fiduciaries looking out for the best interests of our clients. We do not participate in new issues, corporate underwriting or collect sales incentives of any kind. We are paid only by our clients directly.
- We manage individual, segregated accounts held in individual client name with a third party chartered bank as the account custodian and broker. The custodian works for us and our clients, we do not work for them.
- Each account is balanced with a tactical—not static— allocation mix of fixed income (individual investment grade bonds and bond pools), equities, currencies and cash.
- We avoid company specific risk by using indices and exchange-traded funds (ETFs) rather than individual common shares. Stock analysis is a dubious activity when based on financial statements that are purely retrospective in nature and can be misleading or fraudulent in the information they present.
In addition, studies have repeatedly revealed a strong bias on the part of company management and stock analysts who follow them to rate company shares a buy or strong buy at every price and to continually forecast higher and higher earnings each year regardless of whether further gains are reasonable and regardless of whether the economy may be nearing its next recession where stocks typically lose 25 to 45% of their market value.
We have chosen to avoid the perils of individual company risk and management bias, by utilizing ETFs and index units for our growth asset exposure. By removing the specific risk of individual company securities, we can then maintain focus on the big picture of market cycles and the relative risk to client capital at every stage.
- We continually and humbly take our risk measurements on a daily, weekly and monthly basis to actively assess relative price risk through each phase of the market cycle. We monitor money flow in and out of world markets and sectors, following the premise that “a rising tide lifts all boats,” and vice verse.
- We are not mandated to remain long of equities and can reduce the allocation to that asset class all the way to zero if our rule set suggests price risk is too great to justify continued exposure.
- We keep investment fees and costs low and completely transparent. We charge one low annual management fee for our service, thus removing a significant drain on a client’s invested capital. In utilizing ETFs rather than individual company securities we are also able to keep transaction fees in client accounts at a minimum.
- We are very attentive students of market history. History may not repeat itself, but investor behaviour does. We seek to learn from the classic mistakes of other periods and people. We see investor psychology as one of the most dominant factors directing prices in financial markets. Each market is an auction where the participants bid based on individual perceptions of value whether real or anticipated; whether accurate, overly optimistic or overly depressed. In each market cycle there is a distribution from strong hands to weak hands between the various market participants. This has always been so. Our aim is to move with the strong money flow and to be in early and out earlier than the masses.
In a nut shell
At Venable Park we have developed a disciplined, unbiased set of rules regarding when we are adding, removing or leaving capital invested in a particular asset class or market.
We have created these rules to reduce the persuasion and noise of subjective market factors such as individual opinion, fear and greed. We have learned that if we focus on controlling the downside, the upside will take care of itself. We seek to capture the bulk of up-cycle gains while avoiding the bulk of the down-cycle losses. Or in general, as recommended by Wall Street trader Fred Schewd Jr. in 1940:
“When there is a boom and everyone is scrambling for common stocks, take all your stocks and sell them. Put the proceeds in the bank [T-bills]. No doubt, the stocks you sold will go higher. Pay no attention to this—just wait for the recession which will come sooner or later. When it gets bad enough to arouse the politicians to make speeches, take your money out of the bank [T-bills] and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.”
--Fred Schwed, Jr., (1940) Where Are the Customers' Yachts?