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Experience
In investing, there is no substitute for experience. At Monarch,
this experience comes from a blend of individuals from diverse
backgrounds, each of whom makes a unique contribution to the customer
relationship. Together, the seven professionals of the firm have
over 160 years of experience, dating back to the 1960s, in numerous
aspects of investments, trust services, and family offices. We
understand how markets work, how to value companies, how to listen to
our customers, and how to implement a sound wealth management strategy.
We also value your confidentiality as much as you do.
Understanding Our
Customers
The most
important trade secret we have learned in four decades of managing
portfolios is that every customer is different. Different goals.
Different family compositions. Different estate structures. Different
income needs. Different tax situations. Different risk tolerances.
Monarch is in business because we care enough to understand your
complete financial picture. We want to work with your attorney and
accountant, to put our heads together
to find the optimal solution for
any decision you need to make. While others in our industry might hand
you a generic questionnaire, plug the answers into a computer, then
stuff your portfolio with a list of mutual funds that was generated at
their corporate headquarters, we think there’s a better way.
How We Invest
The centerpiece of our investment
philosophy is to own high-quality companies whose earnings will grow
over time, and bonds that are of such high quality that we need only be
concerned with their return on investment, rather than their
return of investment. Having endured six recessions, countless
bear markets, crashes, inflation, stagflation and deflation, we have
learned the value of safety over and over again.
We
typically don’t invest in mutual funds, because we are hired to be the
manager of our customers’ investments, not to pass off the job to
someone else. Mutual funds are valuable in certain situations (such as
401k and 529 plans, where there is no other option), but we think there
are serious drawbacks to mutual funds, which we highlight in greater
detail
here.
Our
goal is to own stocks forever. Our annual turnover on stocks is usually
around 10%, which translates into an average holding period of 10 years,
but much of that turnover is for tax purposes and to generate cash for
our customers to use. Contrast this to the turnover of the average
mutual fund, at 85%. Why should you care? Two reasons: commissions
and taxes. Turnover of 85% costs a portfolio between 0.2% and 0.8% per
year in commissions. These costs are not included in funds’ expense
ratios. And who likes to pay taxes? Mutual funds, in general, pay
little to no attention to the tax consequences of all their trading.
Not only do they generate unnecessary long-term capital gains, but also
short-term capital gains, which we always try to avoid since they are
taxed more heavily.
Our
intent focus on buying shares of enduring, high-quality companies
affords us the opportunity to put together concentrated portfolios of
20-40 stocks. Have you ever looked at a mutual fund’s holdings list?
The average number of stocks is 160! While managers of such funds
declare that diversification is their guiding principle, it could be
called “de-worse-ification.” Many academic studies have concluded that
sufficient diversification to avoid excessive volatility can be achieved
with portfolios of only 20-30 holdings, as long as they are not
concentrated in any industry. We stay true to this by carefully
avoiding excessive concentrations.
Buy
low, sell high. Easier said than done, but at least we try. While we
thought the bear market of 2000-2002, led by the crash in dot.com
stocks, would have rid our industry of “momentum investors,” someone let
them sneak back into the market. These “investors” admit that they buy
high, with a goal of selling even higher. In some markets, they
succeed, but in ugly markets, they end up buying high and selling low.
We believe that we have a fiduciary responsibility to our customers to
safeguard their investments by not taking excessive risk in the
stock-selection process. When we buy low, and a stock goes even lower
(and has not broken our reason for investing in it), we typically buy
more of it, a process known as dollar-cost averaging. This means that
we can lower the average cost of the stock, and buy a stock cheaply in
the process. Occasionally, when a stock becomes extremely expensive, we
will sell a portion of it. In this way, we are taking advantage of the
market’s inherent volatility. In the long-term, it’s a process that
works.
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What makes a
high-quality stock?
Our core stock investment philosophy is
driven by two factors – growth and quality. Stocks are inherently
volatile, but if our companies continue to grow earnings over time, we
should get a return which matches their growth plus their dividends. If
we are able to buy them at bargain prices, the return will be even
better.
How
do we define “quality?”
1. They
operate in an industry that is growing.
2. They
are a leader in their industry.
3. They enjoy steep barriers to entry into
their industry, whether from patents, superior technology, or scale.
4. They
sell a product that is valued by their customers, enabling them to
control the price for the product, unlike a commodity.
5. Their
managements make smart strategic decisions and are nimble enough to
respond to changing environments.
6. They
are financed conservatively.
We
categorize stocks in our customers’ portfolios as:
1) Core
stocks: the highest-quality growth companies in the world, which form
the “core” of most of our portfolios.
2) High-yield
stocks: high-quality companies which pay out a much higher share of
their earnings in the form of dividends, giving them high dividend
yields. While they offer less stability than bonds, their dividend
growth should allow income to grow 7-10%, whereas income from bonds and
CDs does not grow. This is an important distinction when considering
the impact of inflation on the cost of living in the long-term.
3) Small-caps:
small companies with many of the same qualities of our core stocks,
but whose growth prospects are more open-ended than those of large
companies. These are valuable only for customers whose risk tolerance
supports their inclusion.
4) Aggressive
growth stocks: companies growing very rapidly, which make for riskier
investments.
5) Customer-directed
stocks: companies to which a customer has a personal connection, a
special interest, or tax issues (such as a low cost basis).
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How we really feel about
mutual funds...
Why we feel this
way...
How
we really feel about hedge funds...
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