Intelligent Capitalworks Fiduciary Fee Only Financial Advisor
Phoenix | Scottsdale, Arizona (480) 951-2900

Managing your investments

Do you know if your investments fit your goals? Do you know if the strategies for your investment and retirement accounts are structured and managed to best help you reach your goals? Are your accounts invested for the long-term, or are you and your accounts buffeted by shifting market sentiments and related indecision or repeated selling and buying activity to change your investments and investment strategies in response?

Where we fit in. Our clients rely on us to build and maintain a diversified portfolio of long-term investments designed to help free them from the short-term daily distractions of the markets that provide little context in helping them understand the success or failure of their investment plan. We help them meet their planned income and cash needs, invest for asset growth, avoid unrewarded risks and control their tax and investing costs. Our goal is to help them build the long-term wealth that will help them meet their lifelong goals.

We are deliberate investors, not passive market indexers. When we invest, we want to be long-term owners of enduringly profitable businesses, because that is where wealth is created. When we build a diversified portfolio of individual stocks for our clients, we are buying small parts of businesses for them to own as a long-term owner. We focus on owning businesses that have demonstrated a capacity to pay their shareholders increasing dividends over long periods of time. This positions our clients for the possibility to capture the exponential power of long-term compounding of their investment returns that we explore in our original research paper, Dividend Investing.

We don’t want to own the indiscriminate market exposure risk of the S&P 500. Investors who buy a low-cost S&P 500 Index mutual fund or exchange-traded fund (ETF) gain indiscriminate exposure to all of the risks and returns of 500 companies selected by the investment committee at Standard & Poor’s Corporation for inclusion in that broad market index. Our 30 years of experience has been that when individuals are invested in market index funds with the mindset that they are “in the market,” they are much more emotionally exposed to myriad news headline scares and are therefore much more likely to fall prey to the risk of not staying invested when they are fearful, and jumping “out of the market” and their long term investments.

Seminal independent studies by Dalbar, Morningstar and Vanguard looking at the long-term investment behaviors of mutual fund investors confirm our observed experience of the costly errors of investor behavior gaps.

Exposure to the health of the broad economy is not what we seek. One of the purposes behind the S&P 500 index is to create a proxy that helps communicate the economic health of the U.S. economy. Among the selection criteria for inclusion of a company in the S&P 500 index, the company must meet size, liquidity, and share availability guidelines and be financially viable. The index committee defines a company’s financial viability as having at least four consecutive quarters of positive earnings. The committee selects companies for inclusion in the S&P 500 index and then weights them so that they are representative of the industries in the United States economy.

By sharp contrast, we are much more discriminating when we consider the risks of investing in a business and how we allocate our clients’ capital and risk budget to help them meet their planned income and cash needs, achieve consistent asset growth, avoid unrewarded risks and control their tax and investing costs.

Unlike the investment committee at Standard and Poor’s Corporation, we select our clients’ investments based upon more robust financial metrics than the reported earnings performance of a company over the past four quarters, and we are not interested in owning most of the businesses in the S&P 500 Index, for any number of reasons. We are deliberately interested in only owning businesses with a unique set of financial footprints.

We want to own businesses with a unique set of financial footprints. We look for industry leaders with strong, well-established brands. These businesses have historically been capable of producing more consistent and sustainable sales, earnings and dividend growth.

Profit margins. We look for businesses that we believe have defensible value propositions and sustainable competitive advantages. Economic moats can help insulate these businesses from competitive pressures. This can lead to more stable profit margins, which in turn, can lead to more consistent generation of free cash flow to reward shareholders.

Free Cash Flow. We deliberately want to own companies that generate consistent free cash flow. If a company cannot generate free cash flow, it cannot create shareholder value by investing in more capacity, developing new products/opportunities, making acquisitions, reducing debt, paying dividends, or buying back its stock.

Capital structure. We deliberately want to own companies with strong equity capital structures. We are attracted to businesses that provide attractive returns on shareholder capital without the need to be financially levered (risked with borrowed money) to help meet your desired rates of investment return.

Economic value. We deliberately want to own businesses that earn returns on invested capital higher than their costs of capital. This is how management demonstrates that it is adding long-term economic value to your investment.

Stable earnings. We favor less-cyclical, lower-risk businesses. These types of businesses are oriented toward satisfying consumer needs versus wants, or providing essential or proprietary commercial and industrial products and services. These companies can produce more stable earnings and profit margins through the peaks and troughs of economic cycles, and earnings are key, as stock prices and dividends are inextricably linked to earnings.

Dividend growth. We favor companies with rich histories of rewarding their shareholders with consistently rising dividends. Paying dividends to shareholders requires cold, hard, cash-driven earnings, not accrual-driven earnings subject to accounting manipulation and fraud. Sharing profits with shareholders allows shareholders to get paid for their contribution of financial capital, just as management gets paid salaries for their contribution of human capital. Dividends remind management whose money it is. Dividends reduce a company’s cash available and impose greater discipline on management to be more careful and sensible in funding capital projects with the shareholder capital they retain.

Informed patience. We believe our clients’ best chances for long-term investment success depend on being deliberate and patient, long-term owners of enduringly profitable businesses that can pay them increasing dividends to meet their need for a rising lifelong income.1

Client goals and risk measurement inform our portfolio construction. We are also more deliberate constructing client portfolios compared to the construction of the S&P 500 Index. Unlike the construction of the S&P 500 Index, the size of a company does not educate and inform us about our diversification and portfolio construction decisions, nor how to utilize our clients’ investment risk budget. We deliberately employ risk measurement and risk diversification strategies that may help reduce portfolio volatility and may help minimize risks of large losses.

We construct equity portfolios in an effort to help build a steady stream of rising dividend income and long-term capital growth. Our goal is dividend growth greater than inflation, and greater and more stable than comparable low-cost index funds can provide, with potentially better diversification benefits to smooth over the many bumps in the road ahead. Investing for dividend and capital growth is not a get-rich-quick scheme. It is a long-term strategy that can help produce the rising cash flow and capital growth we all need to help replace our earned income during retirement.

Following these footprints helps lead us to investment strategies and portfolios that may exhibit better stability and capital preservation in negative market environments while seeking to earn each client’s desired investment returns.

We invest in bonds for income, capital preservation and diversification. We construct bond portfolios with bond mutual funds, exchange-traded bond funds (ETFs), individual bonds and other income-oriented securities to help provide regular current income and preservation of capital, depending on client needs.2  We generally pursue a multi-sector approach that offers the flexibility to adapt to changing economic conditions, including the risk of rising inflation.

We may selectively invest in publicly-listed alternative investments. We may selectively use liquid, publicly-listed alternative investments to help improve the risk/reward characteristics of an overall portfolio.  Our goal when selecting alternative investments is to enhance any combination of current or future income, capital preservation or growth, or reduced overall portfolio volatility.

1, 2  We may invest in mutual funds and exchange-traded funds (ETFs) for smaller-sized accounts that cannot achieve adequate diversification and economic transactions costs with individual stocks and bonds.  Mutual funds may include open-end and closed-end mutual funds.

DIVIDEND INVESTING

For rising income and growth