July 15, 2007
Dear Clients and Friends,
Enclosed is your semi-annual portfolio performance report. This letter is intended to remind you of our investing principles, as well as to keep you up to date on our firm and investment philosophies.
1. We have discretion over the accounts we manage. We do not discuss investments with our clients prior to buying or selling them. We charge 1% of assets managed. This fee is drawn directly from your account. Clients pay the commission to buy or sell a security. If you sign up for electronic delivery, the current rates are $9.99 per trade. We try to keep commissions as low as possible. These commissions are subject to change, and we have no control over the rates charged. We do our best to limit selling, taxes and changes in portfolios.
2. We take a long-term approach to investing. Our clients should not judge our performance for at least 3 to 5 years. We are value investors. We are typically buying investments that are being dumped by Wall Street. Since we are typically buying investments as they are dropping in price, our performance in the early years is often going to under perform other investments. We certainly suggest that our clients immediately judge us based on portfolio composition and philosophy. We welcome questions and comments on the investments and our approach. We are focused on portfolio positioning and not short-term portfolio performance. Warren Buffett wrote in a letter dated January 18, 1964 (appendix page 6), “It is to our advantage to have securities do nothing price wise for months, or perhaps years, while we are buying them. This points up the need to measure our results over an adequate period of time. We suggest three years at a minimum.”
3. Patience – portfolios, like children, take time to nurture. We are typically purchasing investments, which are being shunned by Wall Street. Examples of these types of purchases included Pfizer, Merck, Origen Financial and AIG.
4. Drops in share prices are welcome – We prefer to have the prices of shares we are accumulating to be dropping and not rising. If the share prices of any of these companies were to materially decline, we would probably look to increase our positions in these companies. We would welcome a market drop in the same fashion that a skier welcomes the winter snow. We are focused investors, and often have concentrated positions. Many portfolios have three positions, which make up over 40 – 60% of the portfolio. This concentration can increase the price volatility of your portfolio. It is very possible, and at some point expected, that we will have a year, or a period of years, where we not only under perform comparative indexes, but also lose money at the same time.
5. I eat my own cooking. – I manage my portfolios and my family’s portfolios in the same manner as I manage yours.
6. We keep reading and learning and most importantly, keep doing what we are doing. I have never been more comfortable with our research and portfolio management. I think we are investors who know “thyself.” We spend most of our days (and often nights as well) on research.
7. Follow the leaders – What I mean by this is to keep honing in on my style, not shifting, just refining and growing. I have learned so much from studying Buffett, Munger, etc. I learned about 16 years ago from listening to “Psychology of Success”, by Brian Tracy the following. If you want to be successful, read an hour a day. Read about something you love in your career and focus on it. I am so thankful I did that. I lost sight of the hour a day, and made it probably an average of 40 – 60 hours a week. Yet, no regrets, I’m having a blast. I feel like I am playing backgammon or chess all day, and getting paid to do what I would do for fun anyway. Following the leaders to me means, study the investors and people I admire, and are within my competence and philosophy, and just keep learning. Charlie Munger recently reminded us that we should “admire and learn from those who are dead – as well as the living.”
8. We try to have as few positions in our portfolio as possible. I would ideally like to have 8 to 10 common stock positions. We try to keep portfolio activity to a minimum. We believe that less trading is preferred to frequent trading. Our fixed income positions will always have greater trading frequency. Typically these positions are temporary in nature. They are temporary for various reasons. Sometimes we feel they are bargains at certain prices and will buy while we perceive that a bargain exists, and at other times we will sell when we feel that the “bargain” has subsided. We also might sell for reasons of freeing up cash for other longer-term positions.
9. We attempt to be tax efficient. We are always focused on tax efficiency. This is evident in our typical “buy and hold style”. Buying and holding gives us the ability to generate preferential long-term capital gains. If you have questions on your portfolio in this manner, please just let us know.
10. We will typically, but not always, outperform the stock averages in down years, and under perform the same averages when they have strong years. There is certainly no guarantee of this, but in our 13 years of investing client’s money, this is typically what has occurred. Warren Buffett discussed the General Market of 1959 on page 2 of his letter Warren Buffett Letters to Partners 1959 – 1969, “I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a “New Era” philosophy where trees really do grow to the sky.”
In Warren’s comments on year 1960, he mentioned something that we certainly believe in, “I would consider a year in which we declined 15% and the average declined 30% to be much superior to a year when we both advanced 20%. Over a period of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur.”
11. Clients will often ask me to give a market prediction. My typical answer is that I have no clue what the stock market will do. The price of investments is a funny thing, and over the short term (short term being 3 years or less), anything can happen. In the book, “The Money Game”, Adam Smith pointed out when J. P. Morgan was asked what the market would do, he said, “It will fluctuate.” Warren Buffett mentioned in his 1958 letter, “I make no attempt to forecast the general market – my efforts are devoted to finding undervalued securities.”
12. The following table indicates the compounded value of $100,000 at 5%, 10% and 15% for 10, 20 and 30 years. It is always startling to see how relatively small differences in rates add up to very significant sums over a period of years.
$100,000 Initial Investment:
Recent Changes at Redfield, Blonsky & Co., LLC
1. We added a co-researcher and financial analyst to our team. John O’Shaughnessy, CPA has been with our firm in the accounting division for 3 years. Prior to his employment with us, he was CFO for a client of ours. Hence, we have been working directly or indirectly with John for over a decade. I have always enjoyed his work and research skills. Last year as we were looking for a financial analyst, I was able to recruit my top draft pick to join the investment management section. John seems to be having a great deal of fun. He has been spending time trying to learn every facet of the business. We have been sharing ideas and research, and we both have a value investment philosophy. John is honest and hard working. I hope to be working with John for as long as Charlie Munger and Warren Buffett have been a team.
2. We recently announced a major ownership change at our firm. We are very excited about this change. Alan Starinsky, CPA, PFS and I are now Co-CEO’s of our company. I have been working with Alan since 1987, and trust him with the world. We work together like a well-oiled machine. Alan specializes in accounting and taxes. If you are at all concerned about the recent change, please call us. I can assure you that the firm is as strong as ever. Here is a link to our news release on the subject 2007_06_15_.html
Questions to Ask a Financial Advisor
We have a section on our website called, “Questions to Ask a Financial Advisor.” question.html We thought it would be a good idea to actually answer those questions for you.
1. What is their 5-year record?
Our “track record” is now 12 ½ years old. All portfolios vary in size, performance, risk tolerances and so forth. With that said, most of our portfolios all have the same components. The differences being, an “aggressive investor” will have heavier allocations to US Common Stocks (or short positions) as compared to a “conservative investor”, whose portfolio has less of an emphasis to Common Stocks.
Typical Annualized Returns and Comparative Indexes*
Period ended June 30, 2007
|11 1/2 years (Inception through June 30, 2007
|Last 12 Months
|YTD June 30, 2007 (Not Annualized)
Our returns above have been reduced for 1% annual fee and all trading expenses. Comparative Index returns have not been reduced for trading costs or fees. Past performance is no guarantee of future results. Investment returns and principal values will fluctuate in all portfolios
2. Is that record theirs? For example, if you are looking at a mutual fund and there was a change in the fund manager, is the past performance of that fund relevant?
We manage all accounts. The performance and deployment record is ours.
3. Can the advisor explain their investment philosophy in simple language? A 10-year-old should be able to understand the logic of the investment philosophy.
The following is our typical philosophy. We refer you to this section of our website, which gives a lengthy discussion of our philosophies. 2006_09_14.html
a. Investing should only be done with a long-term outlook. The need for liquidity in the short term is important, and one needs to make sure that short term money is invested in short term, liquid instruments. Don’t be fooled by someone telling you the instrument is short term and liquid. Make sure you understand what you are investing in. Your portfolio is designed for the long-term. We should not be judged by short-term performance. A portfolio should be judged by a minimum of 3 years, and realistically, 5 years. In our opinion, we should be compared to “Balanced Funds.”
b. Doubt is central to understanding. This is a recurring theme in our investing. We constantly try to poke holes in our research, thought process, valuation techniques and so forth.
c. Avoid investing around noise and macro issues. There are a lot of what appear to be natural occurrences in the world. These include, wars, elections, major world events, weather, booms, inflation, transportation, communication and so forth. We do not try to predict these events. Yet, when there is a paradigm shift, we will do our best to embrace it. One example is our focus in the telecommunications industry. If you review our website, you will see we have been following that industry closely since 1998. Fortunately, we perceived over-valuation and typically profited during the crash of 2000 – 2002. Now we have exposure to the industry on the long side. Hopefully in the future, I will be able to discuss that we were “fortunate” in being involved with that industry.
4. Is the advisor sufficiently educated, trained and experienced?
We spend our days reading various and vast sources information. We read Annual reports, quarterly reports and prepare analysis. We take a minimum of 40 hours of Continuing Professional Education a year. We typically are conducting research all day long. We submerge ourselves in research. We have been registered with the SEC and or State of NJ since 1995. John and I are both CPAs, and we are fairly fluent in financial statement analysis.
5. Ask the advisor, “why are you in the business?” “Besides your alarm clock, what makes you get up in the morning?”
I can’t emphasize how happy I am at my job. If I was retired, this is what I would be doing in my spare time. In borrowing Warren Buffett’s phrase, “I tap dance on my way to work.” There is nothing I would rather be doing.
6. Can evidence be presented to back up the advisor’s investment approach?
Yes. Feel free to ask us for sample portfolios. All portfolios are different; hence we ask that you select a few from our population. This eliminates the possibility of us “cherry picking” our best performing portfolios. Past performance is no guarantee of future results. Investment returns and principal values will fluctuate in all portfolios.
7. Where is the advisors own money invested?
I invest my money, and my family’s money right along with our clients. In other words, “I eat my own cooking.”
8. What is the advisor’s universe of investments?
Our universe of investments is vast. We invest in a situation, which we think we understand. We attempt to forecast future company operations, earnings, cash flows, and then decide if we are willing to pay the current price asked for the specific investment. We attempt to know the company, the vendors, the suppliers and the competitors. If we can’t figure out how a company operates, we pass on the investment. We will certainly miss good investments in this process. We are always looking for a “margin of safety.” Our website has borrowed a quote from financial writer, Jason Zweig, “Investing isn’t simply about being sure you are right, but about making sure you are protected if you are wrong.” We practice this same approach with our Fixed Income Investments.
9. Has the financial advisor created personal wealth using their preached philosophies?
That is a difficult question. I would say that my savings and investment discipline has put me ahead of the game, so far. Again, my portfolios are invested in the same fashion as our clients. Wealth is difficult to define.
10. Does the financial advisor preach to be a genius? If so, be wary, most good financial advisors are not geniuses.
No, I am far from being a genius.
11. Is your financial advisor influenced by day-to-day fluctuations?
Absolutely not. This is evident in our portfolios. If we buy a company at say $30, and we like it at that price, then all things being equal, we would love it at $10.
12. Is your financial advisor concerned with benchmarks and window dressing?
No, again, this is evident in our portfolios.
13. How does your financial advisor get new investment ideas?
a. We might come across a company via a friend, observations of children, and observations at work. Then we will investigate the financials of the company.
b. We will try to project their future earnings. We will try to determine the “quality of the earnings.” We will look at bad case and good case scenarios.
c. We will study the industry, the competitors, the suppliers, the customers and the management. We like to invest in companies or situations where the management’s livelihoods are in sync with the shareholders.
14. Does your financial advisor visit companies? If so, do they ever find anything worthwhile?
I have visited CEO’s of major companies. I can assure you, they do not let onto any type of negative news. I do not think the CEO of a major company will say . . . “Ron, to be honest with you, our chief competitor is gaining market share and stealing our employees. Furthermore, our technology is outdated. To be more forthcoming Ron, we may not be in business in a year and a half. Would it be okay if I gave you my resume?”
As always, thank you very much for reading this long, yet hopefully informative note. We greatly appreciate the confidence our clients have placed in us. Even though I use terms such as “tap dancing to work,” please rest assured that we take our fiduciary responsibility to our clients very seriously. Throughout this letter, we have referenced several older Warren Buffett shareholder letters. If you would like to read these letters, they can be accessed at WEB_letters/WEB_Letters_pre_berkshire.html. Should you have any questions, concerns, or if I have not been clear in any respect, John or I would be happy to hear from you.
Very truly yours,
REDFIELD, BLONSKY & CO., LLC
Ronald R. Redfield, CPA, PFS