Heritage Investors’ Long-Term Investing Strategy
Heritage Investors operates on a philosophy that is rooted in education and patience. We believe in the value of hard work and we apply that to our market research and analysis practices. In conducting our own due diligence, we can approach long-term investments with a strategy that is much more likely to weather market fluctuations and uncertainty. Likewise, the team at Heritage Investors believes that patience is a virtue. By removing emotion from the purchase and sale of stock, our clients stand the best chance of seeing their long-term investments appreciate.
Our approach to asset management is informed by four specific theories: Efficient Market Hypothesis, Modern Portfolio Theory, The Three-Factor Model, and Portfolio Rebalancing.
The Efficient Market Hypothesis
Financial markets are full of intelligent people making rational decisions. As a result, most stocks are appropriately priced. Since most market pricing is in accordance with its intrinsic value, there is little to be gained by seeking out underpriced stocks, blindly following fund managers who have had success in the past, or trying to predict the inevitable ebb and flow of the markets.
The Efficient Market Hypothesis comes from the University of Chicago economist Eugene F. Fama, winner of the 2013 Nobel Prize in economics. Fama explains it like this:
“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. We believe the best predictor of your success as an investor is old-fashioned research and market fundamentals.
For you, as our client, this approach means we will clearly define an investment statement based on extensive research of the financial market, not on media reports, advertisers, or sales pitches. You need to understand that most media outlets view the markets as inefficient. You must decide if you believe the markets are efficient or not. Your view on market efficiencies will guide your investment statement.
Modern Portfolio Theory
Modern Portfolio Theory is designed to maximize the returns that a portfolio will bring for any given risk, or conversely, minimize the amount of risk for any given return. The key insight of the theory is that an asset’s risk and return should not be assessed by itself, but by how it contributes to a portfolio’s overall risk and return. The theory earned the 1990 Nobel Prize in Economics by the collaborated work of Harry Markowitz, Merton Miller, and Myron Scholes.
The work of Markowitz, Miller, and Scholes has had a lasting impact on the way that we invest. MPT assumes that most investors have an aversion to risk. If given the choice between two portfolios with equal expected returns, most investors will select the portfolio that carries less risk. When Markowitz introduced MPT in 1952, he intended to eliminate that idiosyncratic risk. By bundling different investment types together, that risk is minimized, spreading it across many different positions.
Apart from working to minimize risk while maximizing return, Modern Portfolio Theory is marked by its attitude toward diversification. Diversification can be used to design a collection of assets that retains the potential return of an individual asset while lowering overall risk. Diversification may also help increase returns while lowering risks, but there is no guarantee of this.
Heritage Investors believes in the power of diversification and we apply Modern Portfolio Theory when we design our clients’ portfolios.
The Three-Factor Model
The Three-Factor Model was the brainchild of Eugene Fama and University of Chicago colleague Kenneth French. Working from the Efficient Market Hypothesis, they concluded that the lion’s share of a portfolio’s performance grew from three factors:
- The Market Factor: Stocks versus fixed income.
- The Size Factor: Small-cap stocks over large-cap stocks.
- The “Value” Factor: High book-to-market over low book-to-market stocks.
Fama and French began with the understanding that two classes of stocks have tended to perform better than the market as a whole: small-cap and value stocks. From there, they added these two factors to the standard Capital Asset Pricing Model in an effort to reflect a portfolio’s exposure to the two classes of stocks.
When building an investment portfolio, we choose client-specific ratios that are carefully crafted to drive toward predetermined goals. However, over time, these ratios will change due to market fluctuations. Rather than using traditional rebalancing or “set and forget” methods, we utilize technology that consistently monitors, in real-time.
When the portfolio reaches a predetermined target in its asset mix, the software is triggered to “rebalance” the portfolio, adjusting toward its original asset mix. This ensures that your desired portfolio balance is consistently followed, regardless of how often the portfolio is reviewed.
Read more about Target-Band Rebalancing
There can be no guarantee that any given investment strategy will always be successful and never lose money. Disappointments happen in investment markets just as they do in life. However, there is much that can be done to help ensure that your investments bring you the future that you envision. At Heritage Investors, our investment approach is based on information, both the information that comes from an in-depth exploration of market fundamentals and the theoretical understanding that helps us make the most of those fundamentals. We want you to understand the theoretical framework that drives our investing approach and we believe that, by leaning on some of the brightest minds in economics and the financial industry, we have created a proven and intellectually sound approach to making the most of your assets.
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We can help you develop a strategy with the goal of helping you preserve the lifestyle you are
accustomed to throughout retirement.