How We Invest

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

As an investment management firm focused on constructing long-horizon portfolios, our primary investment objective is to preserve and grow our investor’s wealth at inflation-adjusted and risk-adjusted rates of return. Our objective is in sync with our investor base that is comprised of families and other long-horizon investors.

A key requirement of such a portfolio is that it should be able to weather and perform well across economic cycles of booms and busts. Periods of boom give rise to an eventual bust which can take the form of inflation or deflation. If we are particularly unlucky, we end up with both occurring sequentially. The image below illustrates the economic and financial asset cycle via the allegory of the hawk and serpent.

Source: The Allegory of the Hawk and Serpent, Artemis Capital Management

It is important to understand that different assets perform well during each such period.

• • • The portfolio needs to combine pro-cyclical assets like equities and bonds with assets that can do well during periods of bust, whether inflationary or deflationary.
  • • Equities do not provide a hedge against inflation. Bonds fare even worse during such periods.
  • • The so-called retirement portfolio, i.e., the 60:40 portfolio, is not at all geared to deal with the inflationary busts.
  • • Gold, especially in a fiat currency regime, acts as an excellent store of value during inflationary periods. It also doubles up as a safe keeper during deflationary periods.
  • • Commodities and equities of commodity producers earn most of their rewards during inflationary periods and during the secular boom. They lose purchasing power during deflationary periods.

When looked over the past 150 years, this approach to portfolio construction grew investor’s wealth at inflation-adjusted rates in ~98% of the 10-year holding periods, a significantly superior outcome to equities, bonds, and the 60:40 portfolio.

Below, we show the simulated performance of the All-Seasons Portfolio from 1874 to 2021 as compared to the performance of the global equity portfolio. While the All-Seasons Portfolio generated returns that were similar to that of the global equities, it did so with lower risk. It is also seen in the second chart that shows drawdown of annual returns with the All-Seasons Portfolio associated with shallower drawdowns.

The superior performance, in absolute as well as inflation and risk adjusted basis, is driven by the strategy’s allocation to assets that perform differently during economic booms and busts. By allocating to assets that do well during periods of secular growth (equities, bonds, and commodities) with assets that do well during inflationary periods (gold and commodities) and assets that do well during deflationary periods (bonds and a portfolio of active high quality equities), the strategy is able to reduce drawdowns that pro-cyclical portfolios suffer during economic busts.

For more information, Read our Whitepaper on Construction of the All-Seasons Portfolio

“Beware of geeks bearing formulas.” – Warren Buffett

In a world increasingly dominated by passive funds & ETFs and the proliferation of investment factors, we believe in running our affairs in a manner best described as good old-fashioned value investing. What that means to us is to dig through each and every line item that we put into our portfolios. Only when the business/asset/security meets our requirements in terms of business quality do we consider acquiring a position.

One of our core tenets is that we like to focus on businesses and assets that, in our opinion, are of sufficiently high quality. The business/asset owned should have a much higher level of durability. They should be funded in a manner that they can survive through varying financial and economic conditions. The business should be run in a way that is fair to minority shareholders, and there should be no quality of earnings issues.

This is a very different approach compared to the new wave of investment allocators and advisors. In most cases, portfolio construction has become an exercise in quantitative formulations – the combination of various funds and ETFs with no attention to the underlying assets/businesses owned.

White Paper Coming Soon

At MAEG, we are valuation-driven investors. Value investing doesn’t mean we should only acquire businesses trading at low multiples of Book Value or Earnings or, for that matter, any such shorthand. Instead, we subscribe to Mr. Charlie Munger’s idea when he said, “all intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”

That form of intelligent investing drives all our investment actions. We believe that valuation is an essential part of the overall investing equation. However, it isn’t the most important or the only one that the analyst should focus on. Indeed, we believe that the analyst cannot appropriately assess the business’s intrinsic value without first understanding the business itself. No matter the price-to-value equation, we will not invest in a business wherein we believe crooks are at the helm. We look to acquire businesses and assets that, in our opinion, are worth owning as business owners. We then look to acquire them at prices that we consider to be reasonable to cheap.

In most of our investment actions, valuation acts as a rejection rule – when the price of the business that market participants have ascribed to it is such that the long-term returns to an owner will likely be insufficient, we will not invest.

White Paper Coming Soon