5 ENDURING PRINCIPLES

Anchor your investments with our 5 Enduring Principles:

Barrack Yard Investment Process and Philosophy
from The Money Life Show

1. Valuations matter

Price focus is the best protection. Investments, we believe, become riskier as their valuations rise. Original price is the most significant factor guiding future rates-of-return for an asset.

Barrack Yard Advisors looks for low valuations as a way to mitigate the risk of negative surprises that drive market prices:

  • High valuations imply high consensus expectations and increased risk: surprises tend to be negative.
  • Low valuations imply low expectations and lower risk: surprises tend to be positive.

“Obvious” growth opportunities do not always result in good outcomes: in the late 1990’s, many investors correctly estimated the transformative potential of the Internet … yet, Internet stocks failed many.

With too many variables in play, predicting the future is a hopeless pursuit. Confident experts are error-prone and financial prognosticators are no exception.

2. Cash Flow is king

We define an investment as any asset that generates income for its owner.  Examples include profitable businesses and income producing real estate. Assets that do not produce income, such as loss-making companies, precious metals and raw land, are not investments.  They are speculations.

We are biased in favor of companies with an attractive dividend history, as it makes compounding easier:

  • Roughly 40% of long-term stock returns come from compounding dividends
  • Creative accounting methods do not disguise the fact: cash is real

At Barrack Yard Advisors, we believe that investors, as business owners, deserve to be paid. There are, however, instances when we will own companies that do not pay dividends.  These are typically companies with Asset Allocator CEOs with excellent long term results.

3. Investment prices will fluctuate

Volatility and risk are not the same.

Volatility is the price you pay for liquidity. It creates both buying and selling opportunities, but does not alter a fundamental anchor:

Over time, companies we own become more valuable if they continue to manage cash flow effectively.

Driven by current perceptions, volatility indicates that finance is fundamentally a social science, not a hard science. Since successful investing requires a balance between feeling and logic, Barrack Yard Advisors believes that smart patience wins, so long as one’s portfolio is anchored by the enduring principles.

4. Homework is essential

Careful investment selection trumps random diversification and is an integral component of our risk mitigation strategy.

Does an investor achieve proper diversification simply by checking an “asset class box”?

No. This common, but misguided strategy minimizes the importance of price.

Assuming a reasonable price, we want our portfolio to feature the best securities available to us – and not a predetermined basket (which typically includes instruments of dubious investment merit).

At Barrack Yard Advisors, we build portfolios from the bottom, up: focusing close attention to the prices we pay for investments we have studied.

5. ‘Predictive attributes’ are a powerful long term tool

Certain behaviors or factors can lead to desired long term results.  Outside of investing, eating well and daily exercise has the ‘predictive’ attribute of leading to better health results than a diet of junk food and incessant inactivity.  It does not guarantee a long, healthy life but unless one is dealt a bad genetic card, it should help.  We believe investing works in a similar way.

Some of the ‘predictive’ attributes companies must possess for us to make an investment include:  consistent profitability, high returns-on-invested capital, modest debt levels, “skin-in-the-game” managers, family control, and money-making reinvestment opportunities for profits. Critically, a predictive factor is to avoid businesses that may face permanent loss from innovation. Think buggy-whip manufacturers at the turn of the last century. The automobile put even the best of them out of business.

Some of the positive ‘predictive’ behaviors for clients to consider include: view your holdings as pieces of operating businesses, have a long-term plan and stick to it no matter how bleak things seem, and take stock market predictions with a grain of salt.