Why You Need an Investment System - Part 2

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

In my last column - and at The Oxford Club's Private Wealth Seminar in Quebec City this week - I made the case that every investor should run his money using a proven investment system.

If you don't, you're just flying by the seat of your pants. And that isn't likely to deliver market-beating results.

A complete investment system should cover these six foundations:

1. It is based on a realistic philosophy. At The Oxford Club, we recognize that no one can consistently predict economic growth, interest rates or short-term market fluctuations. So we don't waste your time trying. Instead, we put together portfolios based on proven principles of wealth creation. That's how you build a fortune. And that's how you protect it too.

2. It provides a specific asset allocation. How you divide your money up among different classes of assets - growth stocks, value stocks, small caps, foreign equities, bonds, TIPS, real-estate investment trusts and gold shares - is your single most important investment decision, responsible for as much as 90% of your annual return. Yet, in my experience, most investors don't even know what their asset allocation is.

3. It uses strict "Buy" criteria for every security. Sophisticated investors don't throw away money on hot tips and "stock stories." They invest according to hard-and-fast quantitative measures like sales, earnings, profit and operating margins, debt-to-equity, credit quality and yield-to-maturity.

4. It also maintains a specific "Sell" discipline. Anyone can plunk some money down for a fund or a few shares of stock. However, the art of investing is knowing when to get the heck out. With our funds, we rebalance annually, forcing us to sell high and buy low. With our stocks, we follow a trailing stop discipline, protecting both our principal and our profits.

5. It minimizes taxes and expenses. According to a Vanguard study, the average investor gives up 4% annually in taxes and expenses. That's way too much - and guaranteed to stunt your returns. That's why we recommend low-cost providers and offer an asset location strategy to minimize - or even eliminate - annual taxes on interest, dividends and capital gains.

6. It has a proven, verifiable track record. Listen to all the marketing copy and it seems like every investment newsletter editor is beating the tar out of the market. It reminds me of Garrison Keillor's fictional Lake Woebegone, where all the men are handsome, all the women are strong and all the children are above average. (Perhaps that's why the PGA requires a player's opponent to attest the card.) However, the independent Hulbert Financial Digest has ranked The Oxford Communiqué among the handful of top-performing investment letters in the country for the last 13 consecutive years. And singles us out not just for our high returns, but for our unusual, low-risk approach.

What is the alternative to using a proven investment system? Well, you can follow some guru's weekly forecasts. (And hear him explain as time goes by why he's not wrong, "just early.") Or you can accumulate stocks, bonds and funds willy-nilly with no overarching philosophy or strategy. Or you can hope you get lucky.

But you probably won't.

It takes a lifetime of hard work, sacrifice and thrift to build a substantial nest egg. Should you really treat it like chips in a poker game?

Every investor should use a proven, battle-tested investment system, one that maximizes your returns in the good times and safeguards your capital in the bad ones. And, in my admittedly biased opinion, The Oxford Club's is the best there is.

If it weren't, we'd change it.

Good investing,


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The System Works Everywhere, All the Time

The proven system that Alex developed for The Oxford Club works even when things are going wrong in the world. Sure, it's nice when markets are booming, economies are thriving and dictators are slumbering.

But even when bombs fly and markets get jittery, the system works. Good thing too, because the world is sure looking grim these days.

Yet behind the headlines, there are places where fortunes are being made. One such place is China, whose population dwarfs ours and whose economy will soon surpass ours too. It pays to have exposure to such vast growth, which is why Alex added Mark Mobius' Templeton Dragon Fund (NYSE: TDF) as part of the Oxford All-Star Portfolio, a collection of funds managed by the world's most successful investors.

Alex updated Members recently on the performance of the Dragon Fund:

"When you scour the globe for major macroeconomic events, be sure to take a look at China.

"What's happening there - 1.3 billion people enthusiastically embracing capitalism - is the biggest economic development story since the Marshall Plan. It's only a matter of time before China's economy overtakes our own. Dr. Jeremy Siegel, professor of finance at The Wharton School, calls what is happening there today 'the greatest change the world has ever known.'

"This is a positive. Chinese consumer and business demand will be a primary engine of world economic growth for years - or decades - to come. And one of the best ways to take advantage of it is with the Templeton Dragon Fund (NYSE: TDF), part of our Oxford All-Star Portfolio.

"The Templeton Dragon Fund is managed by Mark Mobius. Based in Hong Kong, he is the world's leading emerging markets fund manager, employing a disciplined, value-oriented approach. Our shares have returned 246% since we got in over a decade ago.

"There is still plenty of upside potential here. China is transforming itself from a world-class exporter into one of the world's biggest importers.

"China already imports nearly as much as it exports, over $1 trillion worth of goods annually. Chinese consumers now buy more automobiles than Americans do. Oil production there is massive - and it still meets only half the country's needs. And China is also the world's second-largest consumer of luxury goods.

"Tens of millions travel abroad too. It is estimated that over 55 million Chinese tourists vacation overseas each year.

"Consumers in China are busy buying homes, computers, mobile phones, appliances, financial services and healthcare. Plenty of money will be made in those sectors in the months and years ahead.

"Last Wednesday the Templeton Dragon Fund released its latest asset allocation. The fund currently has approximately 51% of its assets in China, 22% in Hong Kong and 10% in Taiwan. The rest is invested in China-related equity plays from outside the region.

"The timing here is auspicious as Chinese stocks have fallen into the bargain basement bin. The average company is trading at just nine times prospective earnings, compared with 11 times for the broader region (Asia) and 15 times for U.S. and European stocks.

"Why are Chinese stocks so cheap? Primarily concerns about slowing growth and the health of the financial system. Yet both of these concerns are overblown and fully discounted in the market.

"Yes, China has averaged 10% GDP growth over the last three decades. But this year's expected 7.5% growth is hardly recessionary. And you can bet that Mobius - who analyzes the financials, visits each company and meets with management before adding it to the portfolio - isn't holding shares of failing banks.

"In sum, every Oxford Club Member should have some exposure to this fast-growing region in his or her portfolio. And the Templeton Dragon Fund - currently trading at an 11% discount to its net asset value - is a fine place to get it."

Bob Keaveney with Alexander Green

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