Heritage Investors Investment Disciplines

Justin Goodbread, CFP® and Jim DeTar, CFP® subscribe to three specific theories for investment management to provide a disciplined and diversified guideline for today’s investment portfolios: Efficient Market Hypothesis, Modern Portfolio Theory, and The Three-Factor Model.

#1 The Efficient Market Hypothesis

The financial advisors at Heritage Investors believe the markets are efficient. We believe the markets work and strive to build diversified portfolios, utilize asset classes and sector allocations, and capture market returns. We attempt to avoid stock picking, track record investing and market timing.

Eugene Fama is credited with founding the efficient market hypothesis. He stated: "An efficient market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value." Eugene F. Fama, "Random Walks in Stock Market Prices," Financial Analysts Journal, September/October 1965.

What efficient market investing means to you:

  • We will clearly define an efficient investment statement that is based on extensive research of the financial market, not on opinions that can be formed from media reports, advertisers, and investment professionals eager to sell products.
  • You must understand that most media outlets view the markets as inefficient.
  • You must decide if you believe the markets are efficient or not.
  • Your outlook on the efficiencies of the markets will guide your investment statement.

#2 Modern Portfolio Theory

The financial advisors at Heritage Investors believe that Modern Portfolio Theory is still viable in today’s markets. Modern Portfolio Theory earned the 1990 Nobel Prize in Economics by the collaborated work of Harry Markowitz, Merton Miller, and Myron Scholes. This theory is simply defined as:

  • A theory that attempts to maximize a portfolio's expected return for a given amount of portfolio risk, or minimizing the risk of a giving portfolio for a given level of expected return.
  • The concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset.
  • Diversification can increase returns, while at the same time lowering risk.

#3 The Three-Factor Model

The Three Factor Model is the final philosophy which Heritage Investors utilizes. This model defines three independent dimensions of equity returns:

  1. The Market Factor: Stocks versus fixed income
  2. The Size Factor: Small-cap stocks over large-cap stocks
  3. The “Value” Factor: High book-to-market over low book-to-market stocks

In 1991, Eugene F. Fama and Kenneth French were the two economists who conducted extensive research into the theories of risk vs. return. Using Efficient Market Hypothesis as the baseline, they discovered that a portfolio’s exposure to the three above factors determined the vast majority of investment results. These three factors are frequently referred to as the Three Factor Model.

Our portfolio management philosophy encompasses concepts developed by some of the brightest economic and academic minds in the financial industry. These individuals created a proven, intellectual framework that is used by money managers to evaluate the risks and rewards of their investments.