Why Your Financial Advisor's Investment Philosophy is Important for Effective Investing
The right financial advisor can help you achieve your financial goals faster and manage your money more efficiently. However, financial advisors are not one-size-fits-all. The best financial advisor for you may be very different than the best financial advisor for your coworker, neighbor, or even family member. There are financial advisors who specialize in different income levels, estate planning needs, budgeting guidance, and other niche areas. You don’t want to pay for services you don’t need or end up with an advisor without the specific knowledge needed to manage your unique assets.
Finding a financial advisor whose investment philosophy matches your own is key to a happy relationship. All investment strategies share some common elements – no one has the goal of losing money – but take different approaches to choosing where to invest and why to make those investments. Investment philosophies are coherent ways of thinking about markets, how they work, and the types of mistakes that consistently underlie investor behavior.
Why Does Your Financial Advisor’s Investment Philosophy Matter?
“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” - Benjamin Graham in The Intelligent Investor
If all investment philosophies seek positive returns, then why does your financial advisor’s investment philosophy matter? Your personal investment philosophy should take into account your financial goals and capital needs, your risk tolerance, and your timeline. Choosing a financial advisor whose philosophy lines up with your own ensures that your investments will work for you in the ways you need. Most investors who are successful over the long-term refine their investment philosophies over time and do not switch between philosophies in response to market conditions. Common investment philosophies include:
- Contrarian investing holds a belief that some crowd behaviors amongst investors lead to mispricings in securities markets that can be exploited by buying and selling in contrast to the prevailing trend of the time.
- Fundamentals investing focuses on companies with strong earning potential.
- Growth investing favors companies that show above-average growth, even with high current stock prices.
- Technical investing examines past market data to uncover patterns on which to base buy and sell decisions.
- Socially-responsible investing follows a set of moral/ethical business values to invest in companies with social and/or environmental values that align with the investor’s, such as low emissions or no animal testing.
- Value investing seeks to buy securities that are underpriced by the market that the investor believes will rise in price significantly over time.
These are broad categories and an individual investor or firm may incorporate elements of different philosophies into their own investment philosophy.
What is Ridgewood Investments' Investment Philosophy?
"Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
— Warren Buffett in a 2008 letter to Berkshire Hathaway’s shareholders
At Ridgewood Investments, our investment philosophy draws on the considerable experience of our partners managing investments across market environments on an institutional scale. We seek to help our clients achieve exceptional long-term investment performance through the application of proven principles of a value investing philosophy that can succeed regardless of current market conditions.
- We treat investing like a business. Investing requires careful research and understands of past performance, market trends, and what fundamentals you can and cannot control. Our financial advisors apply patience, discipline, and plenty of hard work to hone our investment strategies and practice over time.
- We are value investors. We believe that price-paid is important and that a value-based and value-conscious approach to committing a great business can be a poor investment if the price is too high. On the other hand, great investment opportunities can be found in areas that are currently overlooked and therefore offer lower prices with long-term return potential.
- We use margin of safety to understand and manage risk. Margin of safety is when an investor only purchases securities when their market price is significantly below their intrinsic value. We design our investment portfolios to compound our investors capital over time while carefully mitigating unnecessary risk. Risk is permanent loss of capital as opposed to temporary market fluctuations. We believe volatility can create opportunities for long-term investors. This is an area in which we differ from the majority of advisors and individual investors.
What Does Our Investment Philosophy Not Include?
“Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” doesn’t count.)” ― Peter Lynch, One Up On Wall Street: How To Use What You Already Know To Make Money In The Market
Just as important is what our investment philosophy does not include:
- A short-term approach. We emphasize patiently compounding capital over time and focus on the long-term results of our investments. We invest for rolling investment horizons of between 5-10 years in most cases (although shorter/longer horizons may be used if needed). Investment success is built over years of steady compounding and not by forever chasing the hot stock of the moment.
- Investments outside our circle of competence. No one advisor or group of advisors can competently understand every minute investment option available. We limit our investment activities to areas of investment than we think we can understand, also known as sticking to our own circle of competence. Warren Buffet said “Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital." Operating within our circle of competence allows us to capably evaluate potential investments and make effective decisions.
- Focusing solely on historical numbers. While those who don’t know the past might be doomed to repeat it, those who expect the past to neatly repeat are also in for a rude awakening. Historical numbers are only relevant insofar as they foreshadow future changes. Our advisors also examine qualitative factors such as the nature of the business, company culture, the quality and character of the individuals running the business, and the capital allocation policies the company is likely to implement in the future. We take all these factors into account, along with understanding past performance, to choose investments that will lead to long-term gains for our clients.
Our investment philosophy draws from successful philosophies, practices and insights of outstanding investors like Warren Buffett, Philip Fisher, Benjamin Graham, Bob Kirby, Peter Lynch and other extraordinary investors. Using the knowledge and experience we’ve collectively gained over years of investing; we seek to provide exceptional long-term performance for our clients. If Ridgewood Investments seems like a good fit for your financial needs, contact us for a free investment review.
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For more on how Financial Advisors like our team at Ridgewood Investments are positioning their clients for success, check out my article: "How Great Advisors Are Positioning Clients to Survive and Thrive Through this Crisis".
About the Author
Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.
Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.