Why You Need an Investment System

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
Time to pay the bills

Different people attend investment conferences for different reasons.

Some want a read on what lies ahead for the economy. Others want insights on the future direction of the market. Still others want, as one gentleman suggested at a recent seminar, "just one great stock."

But no one, not even professional economists, knows what the economy will do. Market timers might as well be hawking opinions on The Psychic Network. And while we all appreciate a superb stock recommendation, chances are slim that one stock will dramatically affect the timing or quality of your retirement.

So at The Oxford Club's Private Wealth Seminar at The Fairmont Le Chateau Frontenac in Quebec this week, I suggested that what every investor should really seek first and foremost is an all-encompassing investment system, one that will generate above-average returns in the good times and protect their hard-earned capital when things go off the rails, as they inevitably do from time to time.

(Never forget that every bull market is followed by a ferocious bear market, just as every bear market is followed by a rip-roaring bull market.)

Why is this so important? Let me go back to the beginning...

During 16 years in the investment management business, I would often have a prospective client ask if I could help him or her.

"I don't know," I'd say. "Let me take a look at what you're doing now."

When they showed me their portfolio, I generally saw a list of securities - bought at various times and prices - that didn't seem to have much in common.

In fact, they didn't. Folks would often tell me they read about this stock in Businessweek and learned about that fund from their golf partner or heard Jim Cramer talking about this promising IPO. Often times they didn't know whether the company was profitable or even what it did.

I called it investment by agglomeration. Because that's what it really was, just a jumbled cluster of investments put together with no real forethought, no particular asset allocation and no battle-tested buy and sell discipline.

Make Your Own Luck

Yet they were disappointed to find that they were having "no luck." And, indeed, luck is exactly what you'd need to succeed on such a path.

It still surprises me that some folks spend more time deciding which flat-screen TV to buy than how they're going to reach their most important investment goals. This presumes, of course, that they've even made investment goals.

To say "I want to be rich" or "I want to retire early" is just wishful thinking. "I want to have a $2 million net worth on my 65th birthday," now that's a goal. Whether it's realistic and achievable or not depends on how old you are now, how much you've accumulated so far and what investment system you're following, if any.

Let's say you do have a specific goal and it is reasonable. Then what? The next step is knowing The Only Six Factors That Will Determine Your Future Net Worth:

  1. The amount of money you save.
  2. The length of time you let it compound.
  3. Your asset allocation. (How you divide your investments up among stocks, bonds, real estate investment trusts, metals, etc.)
  4. Your security selection.
  5. Your investment costs.
  6. The tax liabilities on your interest, dividends, and capital gains.

Notice there is nothing here on forecasting annual GDP growth, outguessing the stock market or determining when the world's various geopolitical problems will be resolved.

Those things aren't important to you as an investor. What is important is saving as much as you can, letting it compound as long as you can, asset allocating properly, choosing your investment selections wisely, and minimizing your investment costs and taxes.

I'll be talking more about these - as well as The Oxford Club Investment System that prioritizes them - tomorrow.

Good investing,

Alex

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How to Borrow the Best Systems in the World

Here's a sneak peek at something Alex will tell us tomorrow: that any investment system worth following is one with a proven, verifiable track record.

And there are few tactics more successful, or simple, than following in the footsteps of the very best.

That's the basis of The Oxford Club's All-Star Portfolio, a collection of investment vehicles managed by the world's money masters. Since true genius is rare, the portfolio includes just eight holdings, yet the returns have included gains of 211%... 246%... even 362%.

Biglari Holdings (NYSE: BH) is one of the newer positions, yet it too is in the money, with a 15% gain. Still, with the market rocky this year, Biglari is trading at a discount right now.

Alex recently told Members why Biglari is a must-own holding for any investor:

"Like [Warren] Buffett, Biglari founder and CEO Sardar Biglari has a primary goal to maximize shareholder value for his holding company by identifying simple, comprehensible and predictable businesses. Biglari will take a minority position, a majority position or buy a company outright. But he makes no bones about his preference: to acquire entire business enterprises at attractive prices.

"Biglari says he purchases companies 'for investment not speculation.' His primary interest is not quarterly or year-over-year comparisons.

"The company is engaged in a number of diverse business activities, including media, property and casualty insurance. But its primary business is franchising and operating restaurants. In his most recent shareholder letter, Biglari wrote, 'Plainly, we are searching for businesses that are simply awash in cash... Our expertise lies in taking advantage of mispriced securities.'

"The company has a highly concentrated portfolio. It owns the Western Sizzlin chain and 524-store Steak 'n Shake chain. Biglari also aggressively purchased shares of Cracker Barrel Old Country Stores (Nasdaq: CBRL). (Although he failed to take over the company entirely, as he intended.)

"Net income at Biglari was down in the most recent period. However, like Buffett, Biglari believes the best way to measure shareholder value is by book value (i.e. assets minus liabilities). Why? Because the higher unrealized gains are, the worse operating earnings look. Book value, on the other hand, allows you to see unrealized appreciation.

"Over the years, book value at Biglari has grown dramatically. Yet the stock today is undeniably cheap, and not just because it has come down from over $500 to nearly $400.

"I estimate net income will climb from $7.50 a share this year to more than $12 in 2015.

"Someone who agrees that Biglari Holdings is undervalued is Biglari himself. He has bought millions of dollars' worth of the stock this year.

"Bear in mind, a handicap for Berkshire Hathaway (NYSE: BRK-A/B) is the sheer size of the company with its more than $300 billion market cap. Biglari Holdings by comparison has a market cap of just $700 million. That gives it more maneuverability and a much larger universe of potential investments.

"Biglari is an undervalued company with whip-smart management, great flexibility and an investment approach eerily similar to Buffett's.

"However, the Sage of Omaha is almost 84. Sardar Biglari is just 36 - and poised to deliver years of market-beating returns."

- Bob Keaveney with Alexander Green

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