The bottom line is that if you specifically focus on finding companies that embody strength and resiliency and you buy them at prices that reflect a series of reasonably uncorrelated negative scenarios, you are making your portfolio as a whole more resilient.
Hortz: How is this risk management approach different from other predominant risk management approaches? What risks are they not addressing?
Hoffman: One thing we really like about our approach is that often when risk in a portfolio is reduced, performance is reduced as well. But in Marshfield’s case, we believe that it is the very attributes that support our good performance—namely, company quality, including resilience, and good price—that produce risk mitigation at the broader portfolio level. We don’t have to introduce new rules or metrics or dilute our philosophy in order to achieve that outcome. We can follow our discipline by being patient and holding cash until we see a great opportunity, and we can ignore what other investors do and what stocks and industries comprise the S & P 500—and in the end produce a product that we believe offers both good reward potential as well as capital preservation. It’s not clear to us that many other approaches can deliver the same.
Hortz: What is your best advice to advisors worried about the growing volatility and risk perceived in the markets today, in a business environment of accelerating change and growing uncertainty?
Hoffman: Changing one’s approach mid-stream to account for “heightened” uncertainty would only exacerbate such uncertainty, as it would introduce a new variable into one’s investment discipline, so we would really caution against doing that. Similarly, managing toward a particular apocalyptic outcome presumes the ability to predict not only that outcome and its timing but also its ramifications and the market’s complex reaction thereto. And finally, running for what seems to be cover by retreating from the market altogether might relieve anxiety in the short run, but it both assumes the ability to predict the market and begs the question of when to emerge from hiding should that prediction actually prove correct.
For us, the only approach—both logical and, we think, reasonable—is to accept volatility as a gift and to continue to look for and invest in good, resilient, high return companies just as we always have.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors—Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and ETF Advisor magazines). For more information, click here.