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Published by: Lyon Capital Management, LLC - A Registered Investment
Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
Not All Investors Lost Money
By Douglass C. Lyon, CFA
Over the past 3 years many investors lost
money, in many cases large sums of money. We base this observation on conversations with
people from all walks of life all over the country. We also base the statement on numerous
newspaper stories, magazine articles, and television reports. Actual performance of
individual stocks, mutual funds and market indexes leads to the same conclusion. But, not
all investors lost money!
Why? Diversification and value investing. These two acts can and have made all the
difference for Lyon Capital Management clients. For balanced accounts (accounts whose
assets are balanced between different asset classes), we invested funds not only in stocks
and bonds but also in real estate investment trusts (REITs) and Treasury Inflation
Protected Securities (TIPS).
Within asset classes we diversified even further by holding a significant number of
different securities. For stocks we try to hold at least 20 different issues with
no more than 3 stocks of companies in the same industry. Many investors learned,
painfully, that a portfolio of 20 technology stocks is not a diversified portfolio.
In addition we consistently apply a value approach to stock selection. As a result we
have stayed away from catastrophies like Global Crossing, Corning, Enron and others too
numerous to mention.
We never let a stock holding grow to more than 10% of a portfolio. This strategy
reduces risk and losses. Lyon Capital Management equity clients over the last 3 years have
enjoyed strong equity returns as a result of these strategies.
For the fixed-income (bond) side of a portfolio we typically use a mix of U.S.
Treasuries, Federal Agencies, high quality tax-exempt bonds, investment grade corporate
bonds, and quality preferred stocks.
The risk of interest rates going up and the risk of the issuer of bonds defaulting and
not paying promised interest and principal are the two biggest risks bondholders face.
To reduce interest rate risk we buy bonds of varying maturities. To reduce default or
credit risk we invest in U.S. Treasury securities. These are fully backed by the federal
government. U.S. agency securities have the tacit backing of the federal government.
Insured tax-exempt bonds have the backing of a state or local authority and have interest
and principle payments insured by independent third party insurance companies. We make use
of all of these securities.
To reduce credit risk on corporate bond investments we typically buy a
diversified portfolio of these securities, buy only investment grade bonds, and perform
our own credit analysis on each issuing company.
Now, to be sure there have been time periods when we underperformed the equity and
fixed income market indexes. In the go-go late 90’s our stock returns of 5 to 7% were
not always satisfying. Today returns like that would seem like a gift from the investment
gods.
Our positive equity returns in 2000 and 2001 and strong equity returns, compared
to market indexes in 2002, are the reward for diversification and value investing.
Clients nearing retirement age continue planning on their time schedule, not the
market’s. Those depending on a regular income in their retirement have continued to
receive it. Those hoping to grow their portfolios have nicely weathered the market storm
of the early 21st century. There is never a guarantee for the future, but there
are proven methods to reduce investing risk that we have applied since the inception of
our business and these have served our clients well .
An added bonus is that we have performed this service for a very
competitive and, we believe, reasonable fee. Our fee is based not on hidden fees and sales
charges, fund loads or brokerage commissions, but on a simple one percent of the assets we
manage. Our pay is based on our performance.
If you believe the time is right to get professional assistance managing
your money. We urge you to consider a manager who has performed well in difficult market
times: Lyon Capital Management. Call us or visit our web site at www.lyoncapital.com .$$
Reducing Risk with REITs and TIPS
By Douglass C. Lyon, CFA
Risk. When evaluating a potential
investment, risk is always an important factor. Risk is the flipside of return. In general
terms, the more return an investor wishes to receive the more risk they must be willing to
take. The goal of an investor is to manage the amount of risk taken when constructing a
portfolio. The Holy Grail is to take the smallest amount of risk to get the maximum
return. This, of course, is very difficult if not impossible to achieve.
One of the portfolio risk management techniques
applied by our firm is diversification of portfolio assets. Asset classes we use are
stocks, bonds, cash and two more recently touted assets: Treasury Inflation Protected
Securities (TIPS), and real estate investment trusts (REITs). While these last two asset
classes are getting more attention today we have been using them for quite some time.
Real estate, now the asset that has been re-discovered by investors, can be a part of
any portfolio with REITs (real estate investment trusts). REITs own and manage their own
diversified portfolios of property like office buildings, apartments and self-storage
units. Typically REITs, which are stocks traded on the major exchanges, have not followed
the overall market returns but have acted as an independent class of investment. We have always
invested in these securities and they have proven to be the mainstay of our strong
performance over the last several years.
Not many people are worried about inflation right now, but if you have monitored
your newspaper carefully you may have seen, buried on the back pages of the business
section, a note that the consumer price index (a common indicator of inflation) crept up
in October of this year.
Inflation protection in a portfolio can be achieved with treasury inflation protected
securities or TIPS. These offer further diversification benefits over a portfolio of only
stocks and bonds. The performance of TIPS has a low correlation with all major asset
classes. In portfolio management lingo a portfolio of assets whose correlations of returns
are low is a well-diversified portfolio.
Correlation of returns merely indicates how closely the returns of two assets match one
another. If two assets returns tend to go up and down in tandem then the correlation of
their returns is high. If the returns of two different assets have no discernable
relationship then the correlation of their returns is low. Bonds typically have a low
correlation with stocks because the forces that drive the value of the two assets are
different. Stocks do well when the economy is growing. Bonds do well when the economy is
declining.
Many investors get caught in the trap of buying only those assets whose prices are
going up or whose fortunes appear to be brightest at the moment. In reality when
everything is positive for an asset class, the risk of investing in that asset class is at
its highest. Since we don’t begin to pretend that we can predict when an asset will
be in or out of favor we hold a diversified portfolio of assets, not just stocks, bonds
and cash, but also REITs and TIPS, at all times. Do you? $$
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