Investment

Resetting Your Investment Approach


[The past few years have provided us with plenty of world-altering events, horrifically bad news and massive challenges. I think the big investment story though is not inflation or the pandemics effects on the economy, but how well many management teams responded to these challenges. It is not just what winds are blowing in your face, but what course corrections and strategic decisions you make to address them; maybe even finding a silver lining in some of those storm clouds. This may be the time for investing with an ownership mindset through fundamental analysis and deep understanding of corporate management. This confluence of events may well be shifting the investment universe into a stock picker’s market.


To explore this further, we reached out to Institute member Robert Scharar, president of Houston-based FCA Corp and president and portfolio manager at Commonwealth Funds, who invests with a very practical investment lens focused on business management and the business activity on the ground. His decades of direct investments and participatory business consulting expertise in a wide group of frontier and emerging markets provides a valuable perspective on investing through turmoil and is leading him to call investors towards a great investment reset of focusing on company managements and their business strategies.]


Bill Hortz: How would you characterize investors reactions to the current market environment?

Robert Scharar:
There are lyrics from an old rhythm and blues song that comes to mind – “I hear you knockin, but you can’t come in”. That lyric seems to summarize the reaction of many investors to the daily barrage of very troubling news on the economy, government spending, irrational policy actions, global turmoil, rapidly rising interest rates and fuel prices, and dropping equity, bond, and crypto markets. The disruptions of not enough baby formula, lack of or delays in obtaining vital goods, shortage of labor, and rising inflation fueled by war and supply chain breakdowns are not normal, yet investors seem gridlocked, hoping yesterday’s forever bull market will soon reappear. 


Hortz: What approach do you feel investors should be taking?

Scharar:
I think this is a perfect opportunity for investors to reset and embrace a new investing approach from the previous “bull market” mentality which was often more reminiscent of gambling or being in the throes of a Ponzi scheme. I feel this myriad of structural forces is creating the need for a return to a back- to-basics approach to investing. Now is a good time to urge investors to reexamine traditional fundamental investing principles and focus on company managements.


Hortz: How can investors determine the best corporate managers to invest in? What do you look for?

Scharar:
We like companies that embody the 3 R’s — real companies, real products and real financials. The “real company” can be defined as one that embraces governance principles, transparency in reporting, communicating the business strategy, and providing a reasonable return to the shareholders.


Hortz: Can you give us an example or two by way of illustration?

Scharar:
These are two companies we own that are good examples:

South Port New Zealand Ltd web site clearly states “our purpose — to facilitate the best logistics solutions for the region.” It has built a successful business model around supporting trade in the “Southland region” of New Zealand while returning cash to shareholders as dividends and deploying the retained earnings to add to the infrastructure to meet changing needs and take advantage of new opportunities.


Harleysville Financial Corporation has been providing banking services for over 100 years to its Pennsylvania neighbors. The board and management’s stewardship have been able to continue the contribution to a community only a truly local bank can provide and at the same time rewarding shareholders while “honoring the safe and conservative principles that have served us well over the years”.


Hortz: What else are you advising your firm’s clients to do or think about to guide them into this Investment Reset?

Scharar
: Some key elements of what we discuss include:

1. As to financial assets, focus your portfolio on quality companies with strong management teams. Use open and closed end funds to acquire diversification of issuers or to hold riskier or more boutique assets for diversification purposes and access to manager expertise. ETF’s can be useful in gaining sector allocation.


2. Investment allocation means more than just in domestic equities or fixed income. Include global assets and alternative opportunities. Avoid unmanaged allocations to funds or ETFs that look only to the issuer market size.


3. Buy more individual stocks and bonds, especially when you are buying investment grade fixed income or larger cap stocks, versus index funds as this reduces your portfolio expenses and can help you differentiate your returns.


4. Be mindful of the impact of market sector allocations. Through early July, the S&P 500 average performance was down over 19%. Of the 11 Sectors, 7 performed better than the average and 4 worse. The range was between a positive 23% + for Energy to a negative of over 30% for the Consumer Discretionary Sector. Market performance takers who just bought the index did worse than 7 of the 11 sectors.


5. Look at your investment allocation as a part of all your assets, not just by your brokerage account. For example, if you have bank instruments, a treasury direct account, investment real estate or life insurance cash values, then consider these as part of your overall allocation.

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