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. History is a powerful force.

Reversion-to-the-mean – an event where security prices or other data points move back toward their long-term historical average – is the most powerful force in finance.

Barrack Yard Advisors believes that valuation in relation to long-term trends is the best anchor.

How does an investor identify attractively priced markets or individual securities?

We start by comparing current valuations against long-term trends. We do this for markets as a whole; and, for equities, we also look at particular industries and then, individual companies.

Our mind-set includes ‘paradigm shifts’ and ‘Black Swans.’ These rare events do not undermine the usefulness of reversion-to-the mean analysis:

  • Paradigm Shift
    Fundamental change in the investment climate, as was the case for bonds in the early 1980’s.
  • Black Swan
    Unpredictable event, can be either positive or negative. A scientific breakthrough with respect to energy capture is an example of a positive Black Swan. War between the U.S. and China, a negative Black Swan.

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. Dividends are important.

Dividends make 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, limited instances when we will own companies that do not pay dividends