"The concept of cyclicality implies predictability and predictability when applied to stock prices implies profits - consistent, non random profits." Bob Mann, Advisor's Capital Investments
[The Institute for Innovation Development recently sat down with Bob Mann, CEO of Advisor’s Capital Investments in Woodstock, Ct which provides a unique mix of services offering financial education, support and specialized money management services for institutions, high net worth investors, and leading financial advisors. Bob is an expert on market cycles and a market technician with a very strong case for active money management over passive investing.]
Hortz: Bob, you’ve been involved in this active versus passive debate for some time. You go back to 1978 with a study called “Non Random Profits” which was your answer to Burton Malkiel’s “A Random Walk Down Wall Street”- a book that argued professional investors and mutual fund managers did not outperform a random selection of stocks and helped spawn the development of index funds. The research in your study led to very different conclusions about active management. Can you share with us what your research findings were and where you now stand on the active versus passive debate?
Mann: Contrary to the random walk approach which assumes that an investor can do just as well with a stock selected by chance as with stocks bought with extensive research or while trading with a trend, our study identified stock price patterns that would enable an investor to buy low and sell high with an extremely high degree of consistency provided he or she used some discipline. The Non Random Profit approach we developed gave the investor two basic rules to determine what stock to buy and what price to pay for it – the eleven quarter rule and the 25% rule.
The results of applying our approach to data stretching back to 1936 showed numerous stocks and industry groups poised for large gain. The method identified over 600 stocks which on average gained more than 300% within approximately three years from their theoretical date of purchase. There were no losses, only 8 issues rose less than 50%. History shows that they all rose in conformance to past data.
Over the last 40 years this has continued to be the case. The concept of cyclicality implies predictability and predictability when applied to stock prices implies profits - consistent, non random profits. This approach, along with other methodologies from a number of other active managers I have uncovered, have placed me firmly in the active management camp. Since the study was published, easier access to big data and the low cost of computer power have allowed serious students of the markets the ability to define shorter term cycles in stock prices and to use quantitative analysis to discover opportunities within the long term cycle.
Hortz: Well, here we are 40 years later still arguing “active” versus “passive” investing with flows shifting - aided no doubt by the coming DOL fiduciary rule - increasingly to lower cost ”passive” investing options. Why are we still embroiled in the same debate?
Mann: The debate continues because the size of the money management business has become so large that successful managers are increasingly restrained from pursuing absolute returns. They are often structured around asset allocation and style boxes. Each manager is seeking to perform as compared to their peer group. Managers have been educated and are duplicating efforts over buying stocks based on forecast earnings growth and business performance. The size of these funds often leads to a portfolio owning a great many stocks just like an index fund. These funds usually have total costs much higher than index funds, leading to a poor comparison, but what about the potential for wealth creation?
There are active managers that have wealth creating performance. A fairer comparison for this debate would be to compare index funds to unrestrained active asset managers. In truth, the really great active managers are not found in great quantity because many managers have been educated or forced by industry convention to seek relative performance. Investing to create wealth usually means not correlating to indexes. It requires patience from the investors to hold during times when the index performs and the portfolio does not. In addition volatility might be higher than the index at times. I have found that best active managers often protect account values better than an index during big market declines like 1987, 2000, 2008.
Hortz: You have mentioned in our discussions that your continued research and money management offerings have now included putting together a consortium of proven specialty active managers. Please tell us a little more about this group and the criteria you use in determining new investment managers to include?
Mann: In the process of marketing my investment services to other advisors, I found a few relatively small advisors who were either doing better than me or offered a different type of investment methodology that offered a risk/return profile that was very special. I am looking for active managers that have exceptional performance, not over diversified, are small and could use some more exposure. The difference between index performance and a manager like this should be easily observable. We want to help qualifying managers get their message out to independent advisors by offering distribution services and strengthen our overall investment offering at the same time.
Hortz: In your ongoing investment research, what do you see by way of innovation trends in money management?
Mann: I see innovation in money management through the use of Artificial Intelligence. The best known manager using Artificial Intelligence is The Renaissance Medallion Fund which is not open to the public, but has a history of unheard of returns for many years as reported by Bloomberg. This management company is active and seeks the highest absolute return commensurate with the risk it is willing to take. This manager rarely has a bad year and draw downs have been small relative to the excessive alpha it has produced. It is a great example of an advisor seeking excellence that is not restrained by style boxes, over diversification and a focus on relative return rather than a high absolute return.
With more and more access to big data and higher performing processors and analytics, I believe AI in investing is in the early stages. One of our emerging managers in our money management consortium uses AI to manage a diversified portfolio of ETF’s. He has won Top Gun competition recognition multiple times.
Hortz: How would you describe the unique services and ways you work with your varied clients?
Mann: Advisor’s Capital Investments believes in active asset management seeking to produce wealth over the long term and to offer disciplined, rules-based strategies that have a daily plan for risk control. We also recommend other advisors that meet high standards of performance using disciplined strategies that include risk control. Today, markets are high and risks are great. You must have a detailed plan for risk control. Understanding investment math allows you to build a plan that accepts risk in exchange for long term rewards.
But probably the most distinctive service we offer is the way we educate and collaborate with our clients on investing by also functioning as a curator for their ideas. We feel the most important element in the client-advisor relationship is to deeply listen and find ways to work with your clients. By having a great deal of experience over a long period of time as a student of the markets, we can be an expert guide for our clients.
For our independent advisor and RIA clients, we are currently reaching out to collaborate with them to bring high alpha active managers to more investors. We firmly believe that excellence in money management is a collaborative effort.
Hortz: Can you share with us details about your newly launched Executive Intelligence Network and your thinking behind this effort?
Mann: The focus of the Network will be on intelligence gathered from executives and entrepreneurs concerning special situations in equities. Executive contacts and specific expertise often have immense value in uncovering exceptional opportunities for investment. During my 48 years in the investment business many of the very best investment opportunities came from my executive clients. I remember back in the late seventies a utilities engineer from New York told me he was buying many millions of shares of Telephonos De Mexico for .125 cents per share paying 10% in dividends. This investment eventually made him extremely wealthy. More recently over the past few months a client asked me to buy a biotech stock that was not heavily covered by brokerage firms and it doubled in a short few months. This was the inspiration for the creation of this network.
We are not interested in inside information. We simply seek information about special situation securities that are not receiving Wall Street attention. We are not looking for penny stocks, but companies with real value and breakthrough opportunities that are not widely known by institutions. We are not looking for short term trades or small gains either. We are looking for a potential of 100% gains or more over a period of four to five years. I have found that these opportunities are found in pre IPO investments, IPO’s and publicly traded stocks that fall out of favor and find new life based on some triggering event. The Non Random Profits investment approach identifies and validates the stocks and industry groups that are poised for future profits. It is helpful though to know the triggering events that may put the individual issues in play.
We are building this investment network according to Metcalf’s law - the greater the number of users on a network, the more value the network becomes to the community. The social utility of a network depends on the number of nodes in contact. We have about 500,000 email addresses of high net worth executives that we plan to invite, along with referrals from our friends. As we will be taking an educational approach and the membership indicates their desires for tax planning, financial planning, retirement planning, and financial life consulting, we hope to work with financial planners and advisors across the country to address those needs. We welcome financial advisors to collaborate with us by joining the Network. Just search for The Executive Intelligence Network on LinkedIn.
This article was originally published in Financial Advisor Online.
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