Investment Philosophy

The Investment Philosophy for Ebb St. Advisors is simple:  Long term investments designed to mimic the market for as cheaply as possible  The key terms being market returns and long term.

I remember one of the anecdotes passed on by one of my economic professors. He relayed the simple task of flipping a coin. Everyone knows that flipping a coin is a 50/50 toss.

Let’s just do some math with a simple game: flip a coin, heads wins (stays) and tails lose (leave):

Flip #1

  • Participants: 1024
  • Winners (50%): 512

512 of the flippers successfully tossed a heads. These winners move on.

Flip #2

  • Participants: 512
  • Winners (50%): 256

256 winners move on.

Flip #3

  • Participants: 256
  • Winners (50%): 128

128 winners move on.
Flip #4

  • Participants: 128
  • Winners (50%): 64

64 winners move on.

Flip #5

  • Participants: 64
  • Winners (50%): 32

32 winners move on.

Flip #6

  • Participants: 32
  • Winners (50%): 16

16 winners move on.
Flip #7

  • Participants: 16
  • Winners (50%): 8

8 winners move on.
Flip #8

  • Participants: 8
  • Winners (50%): 4

4 winners move on.
Flip #9

  • Participants: 4
  • Winners (50%): 2

2 winners move on.

Flip #10

  • Participants: 2
  • Winners (50%): 1

In the end, would you say that this final winner is the best coin flipper among the thousand original participants? After all this final winner successfully flipped heads 10 times in a row. He is the top 0.1% of his class (the only one out of 1024 that flipped heads every time). But the question remains: was there any “skill” in flipping heads 10x in a row or was it a statistical anamoly.

This stuck with me. Combined with studies that prove actively managed funds tend to underperform the market as a whole over the long term, it becomes obvious how to invest for retirement. Individual investors should strive to get the market routine over the long term. “Beating” the market consistently is nearly impossible, exorbitantly expense to try to do and a good way to add unneeded stress of “timing” the market.

Mutual Funds vs. ETFs

Over the long-term, you cannot expect to outperform the market.  Your investment strategy should strive to match the markets return over the long run.  

THE BUFFETT EFFECT

Everyone will be able to point out the great investors like Warren Buffett, a unique talent that is greatly misunderstood. Buffett believes in the buy and hold strategy.  When he buys something he usually has two goals.

  1. Purchase something as cheaply as possible (investor speak would be undervauled).
  2. Hold onto the investment for the long term and enjoy the earnings.

Buffett likes to own companies.  He purchases companies that are undervalued based on his analysis that have the potential to generate earnings and other “float” that would allow him invest back into himself.  Berkshire Hathaway provided Buffett a portfolio of investable cash to pursue his investment strategies.

When choosing something to put all your money behind:

  1. a single company or small group of companies
  2. or, almost every company in the market

Unfortunately most of us do not make a living of assessing the valuations and prospects of a broad array of companies and industries.  For the individual investor, he should adopt the strategy of staying as close to the center of the market as possible.  There is little chance of beating a “market pro” so getting the average of the market will be a healthy second choice.

The market provides a low-cost and straight forward method for investors to invest in the market as a whole.  These securities are called Exchange Traded Funds (ETFs) and trade on the stock market during the day.  In particular, an investor has the ability to purchase index ETFs that are designed to mirror the performance of the overall market.

More information about ETFs here.

Taking a buy and hold long term approach with the purchase of low-cost index ETFs, utilizing tax-advantaged retirement accounts, the power of compounding, periodic rebalancing to match updated investor risk profiles, couple with a extremely low cost approach should produce returns approximating the market as a whole.

Portfolio Allocation

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