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Portfolio Management

Portfolio Management Notes

Mader & Shannon Wealth Management:
George Shannon, Chief Investment Strategist and Portfolio Manager

Research and Analysis Methods:
Philosophy, Daily Routine, and Strategy

Overview:

This outline is designed to introduce new clients and potential clients to both the investment philosophy and practical daily routine of the Portfolio Management division of Mader Shannon Wealth Management.  As the Chief Investment Strategist and Portfolio Manager it is my responsibility on a daily basis to digest relevant researched economic, financial, and market information of various types and from diverse sources both to protect our clients' capital and to achieve very competitive investment results. 

Experience:

Our approach to investing and our appreciation of the role the market itself plays in investment results is based on my 30 years of experience as an investment advisor in the securities industry.

My career started in 1974 as trainee at Merrill Lynch in New York and then a stockbroker for Merrill Lynch in Houston,  I received management training at Payne Webber, (now known as UBS) and worked as a Producing Branch Manager at Payne Webber, A.G. Edwards and Southwest Securities.

I have been doing economic commentary since Graduate school, writing articles for the Daily Texan providing a morning market report for Austin Radio Station KVET, then appearing on television and radio in Texas. Currently I am an occasional guest columnist on market issues for the Kansas City Star.

Philosophy:

Having managed money for thirty years, and having experienced both bull and bear markets in periods of both overvaluation and undervaluation, I believe that active money management is the most effective, responsible way to manage clients funds.   As a supporter of the Graham-Dodd approach to determining value, I believe the present value of expected future cash flows is the standard for valuation.  Three academic articles that underpin our philosophy are Valuation Ratios and the Long-Run Stock Market Outlook: An Update" by John Y. Campbell and Robert J. Shiller" Stock Market Returns in the Long Run" by Roger G. Ibbotson and Peng Chen: and "From Efficient Markets Theory to Behavior Finance" by Robert J. Shiller.

One important area of understanding I think central to success is an appreciation of the dynamics of the overall market environment: acknowledging both the positive and negative power of momentum and respecting the concept of a “crowded” trade, and knowing that the "market" can both over-value and under-value individual stocks and entire sectors for extended periods of time.

I believe it is important to understand that the market itself creates a demand. Forces within it can materially affect demand for certain groups or types of stocks. For example, the current use of Exchange Traded Funds (ETFs) creates a demand for stocks people may not have normally been interested in buying.

My investment decisions draw on the experience of having made investment decisions in all types of market environments for over 30 years, and are based on sound fundamental independent research of the investment and the role it plays in the market environment.

Accurate and descriptive measurement of our progress in order to illustrate our performance in as many ways as possible to show our clients how their portfolios are doing.

Concentrate on both our overall performance as well on individual client portfolios.

Daily Routine:

  • Begin the day at 3am to check foreign markets using CNBC and internet.
  • Evaluate U.S. markets using CNBC starting at 5 am.
  • Assistant in by 7am.
  • Run reports to compile results from the previous day’s market.
  • Set up a spreadsheet to track our progress through the day.
  • View a three-dimensional map of the market to visualize the strength of individual stocks and sectors.

Research Materials:

  • S&P Reports (looking for S&P Ratings and recommendations, as well as News on individual stocks)
  • Zacks Investment Research (We receive daily updates of all positions by 4 a.m., including changes in earnings estimates and analysts upgrades or downgrades).
  • Value-Line Investment Research.
  • McDep Independent Energy Valuation. The McDep ratio stands for Market Cap and Debt to present value of energy businesses. McDep’s website gives a weekly analysis of energy income stocks in the U.S. and Canada. 

Analytical Tools:

  • Vector Vest Graphs: updated after each market session: provides technical outlook for current and prospective holdings, as well as updates widely followed indexes such as the CPI and Fed Funds Rates. They illustrate the performance of individual stocks, indices, and sectors. A typical graph will go back 5 years.
  • Updatable spreadsheet. This allows us to have on hand a watch list of all the positions we own, the value of each position relative to our total holdings, and an up-to-the-minute quote for each stock.
  • Advent Axys Reports. Advent Axys is the software we use to manage all our accounts and positions. Advent allows us to run a plethora of reports depending on the data we are searching for. For example, we can see what percentage of each type of holding each client owns.
  • Map of the Market. This tool gives us a three-dimensional illustration of our positions as well as the market as a whole.

Strategy:

  • We look for High Dividend, High Yield, High Quality stocks, approved by the S&P.
  • Our choices are based on a combination of experience of how to analyze present value (which tells us if we think a stock is overvalued) and analysis of hard numbers which show how a stock is perceived by the market.
  • Factors we take into account when analyzing present value and the value of future cash flows are the expected interest rate and the rate of inflation.
  • If a stock is in an Exchange Traded Fund (ETF), there will be additional movement surrounding it. Therefore, we are more likely to buy stocks that are in ETFs.
  • Keep in mind the Modigliani Theorem that a rational executive will use internal funds (instead of paying a dividend) only to the extent that can get a rate of return higher for his shareholder than the going interest rate. In other words, it makes no difference if a stock pays interest rates or not because it is maximize returns for the shareholder either way. The reason that we often look for stocks with high dividends, however, is that in the real world executives are not always as rational as they are in theory.
  • It’s true that investing in the company instead of paying dividends is good for growth, however, it ignores the need for current cash flow of investors, which is another reason we look for stocks with high dividends.
  • The stock of a company with debt is fine. Debt is often needed for expansion, as long as the rate paid on bonds is lower than the interest rates paid on outstanding loans.