Wealth Management Approach

Have you ever invested money, lost money, and not liked it? You are probably smiling or rolling your eyes and nodding your head affirmatively.

In the capital markets -stocks and bonds - there is no risk free investment. So, to be prudent stewards of our investment portfolios, there are four things to remember with regard to investments.

First, remember that there is no risk free investment. Even a Bank Certificate of Deposit carries with it the risk that you may be locked in at a lower level of interest return if interest rates rise while you are holding the CD.

Second, be aware of what the specific risks are in every investment that you make. For instance an investment in a small technology firm may incur the risk of inexperienced management, under-capitalization, or a technology that does not pan out in the market place.

Third, understand whether the risk level is high or low. For instance a sound, well-established company may have an extremely over-priced stock which makes it a high risk investment irrespective of the underlying quality of the company.

Fourth, and most important, is to employ a sound and disciplined methodology to proactively manage the risk in every investment that you hold. Bob Rubin (former Secretary of Treasury) in his book In Uncertain Times said something to the effect that every day you hold onto an investment is in essence making that investment decision again.

Hippocrates is referred to as the Father of Medicine. Back in the fourth century BC he managed to separate out medicine from religion as a distinct body of knowledge and practice. Some scholars attribute the phrase "First and above all do no harm."* to Hippocrates. It was not from his Hippocratic Oath but from one of his some 31 works entitled "Epidemics". Be that as it may just as the words "First and above all do no harm" applies to medicine, health care and health management, these words are also very appropriate to use regarding your money, your Wealthcare, and your Wealth Management. So we have adopted Hippocrates medical practice advice as one part of our investment mantra.

Hippocrates: "First and above all do no harm."*

The second part of course is "Create Wealth safely."

William Baker & Associates, Inc. has incorporated the mantra, "First do no harm, and Create Wealth safely."*  Our investment methodology is aimed at preserving and growing wealth.

Before you go off the deep end and think that you can be a 10% or 12% CD investor, lets discuss what we mean by harm. Obviously investments are subject to up and down movements in the market place. Indeed without risk management a great deal of money can be lost if all of one's eggs are in the same basket. Some stocks may come to mind such as Enron, Worldcom, and so on. Even with an exit or sell strategy, if a company's stock price falls off the cliff, you or your professional advisor may not have the time to get out before the damage is done. The idea of it fluctuating back up may or may not be valid. It will not be valid if the company goes bankrupt. That is irrecoverable money and suggests a strong argument for practicing sound diversification as part of the approach to "do no harm and create wealth safely."*

So how do we define harm, given that an investment naturally has its ups and downs? Based on years of experience, we've discovered that each person has his or her own threshold in defining financial harm. It is well known amongst investment professionals that the glad factor in making money has far less weight than the heavier weighted sad/mad factor experienced when losing money.

In 1999, the last time I met with him, Fred was worth about $2,000,000. He did not open an account with me! I called Fred a few years later and he started the conversation "Bill you're talking with Poor Fred". Not going into all the details he had his nest egg invested in two stocks: WCOM and LU.

What were the two things that turned Fred into Poor Fred? it was WCOM and LU. The two things that could have prevented his personal catastrophe were very simply diversification, a disciplined approach to investing, and using a risk management technique that works.

In short, we apply two bodies of research in our portfolio and risk management approach.

Fundamental research covers micro and macro economics of a market, a sector, or an individual security. A few examples falling within fundamental research would include financial strength, management strength, the quality, and demand for goods and/or services produced.

We also apply Technical Research. Here we look at market action in terms of supply and demand. Approximately 80% of the risk in a diversified stock portfolio is market and sector risk. We have learned therefore that it is very important to keep our fingers on the pulse of what is happening in markets and sectors with respect to supply or demand.

Over the past several hundred years, risk management has grown in stature and importance with regard to most fields including that of capital markets investment. We embrace this risk management approach to investing. We also keep ourselves on the cutting edge with regard to our research tools and the tools we use for day-to-day management of our clients’ investment positions.

We typically require that all of our clients be provided an orientation and education on our methodology and our disciplined investment and risk management approach. We hope to have this educational orientation program incorporated into this web site sometime next year. In the meantime, we are providing that education one on one and in small group sessions. It usually is about one hour in length and intended to be easy to understand as well as very educational. 

*Past returns are not indicative of future performance and investment returns are not guaranteed. Investment principal can be lost with almost any investment program.

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