The principles listed below have been tested and proven by the Gerber Taylor team over a wide variety of market environments in our 25+ years. Our experience allows us to have the confidence and discipline to stick to these guideposts in periods of high market stress such as 2008.
Price matters. Price is the most important driver of future returns and, equally important, determines the margin of safety of any investment. Value is the most important consideration in our asset allocation and manager selection process.
Reversion to the Mean
Reversion to the mean is one of the most powerful forces in financial markets. Periods of extraordinarily high returns are followed by periods of extraordinarily low returns and vice versa. Asset classes, markets, strategies and managers all tend to mean revert.
We are attracted to asset classes, sectors and strategies which are unloved and out of favor. As Sir John Templeton put it, “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”
Alignment of Interests
Size matters, fees matter, people matter, business practices matter. Successful long-term relationships require a thoughtful alignment of interests between an investment manager and its clients.
Manager Risk Over Market Risk
We work with extremely talented, process driven managers in inefficient markets. These managers exert considerable influence on their investments in an attempt to influence their outcomes. We prefer this activist manager risk to broad market risk.
Win by Not Losing
If we avoid the big mistakes our winners will take care of themselves. Our universe of investment opportunities is great. If we simply avoid the worst of these we will beat the averages consistently.
Benjamin Graham noted that markets in the short run are like a “voting machine” – fickle, frenetic and illogical. In the long run, however, the market acts like a “weighing machine”, where true value is reflected in the stock price. Our long-term investment horizon and broad diversification encourage a patient approach with a focus on fundamentals.
Search for Inefficiency
As patient long term investors, we can take advantage of pricing inefficiencies in less liquid markets. The dispersion of manager returns is inversely correlated to market efficiency, thus skilled managers are more likely to thrive in inefficient and less liquid markets. Emerging markets, private equity and distressed markets are examples of inefficient markets.
We have long embraced diversification as the great “free lunch” in portfolio management. We enhance the risk reducing properties of diversification through the inclusion of non-correlated alternative investments in our model portfolio. This high level of diversification allows us to maintain a very low exposure to low return fixed income securities.