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Lorintine Capital’s Investment Philosophy

January 23, 2019

Investopedia defines an investment philosophy as “a set of beliefs and principles that guide an investor’s decision-making process.” In this article I’ll share a few principles that guide our investment philosophy at Lorintine Capital.

Before I jump in, some definitions:

“Cash”: 1 Month US Treasury Bills
“Bonds”: Bloomberg Barclays US Aggregate Bond Index
“Market”: Dimensional US Market Index (US total stock market)
“Small Cap Value”: Dimensional US Small Cap Value Index

One of the foundations of an efficient market is that an increase in risk results in an increase in expected returns. Therefore, over an investor’s lifetime, we expect that:

  1. Bonds will beat cash. Those who buy bonds accept certain risks such as inflation and default risk, among others.
  2. Market will beat bonds. Those who buy common stock give up the promises to pay provided to bondholders by the bond issuer.
  3. Small cap and value stocks will beat market.
    Academic research has highlighted how small cap and value stocks have a variety of unique risks vs. the total stock market.

Below are annualized index returns over the last 10, 20, 30, and 40 years to illustrate our investment philosophy:

Last 10 years…
Cash: 0.3%
Bonds: 3.5%
Market: 13.4%
Small Cap Value: 13.9%

Last 20 years…
Cash: 1.8%
Bonds: 4.6%
Market: 6.3%
Small Cap Value: 11.3%

Last 30 years…
Cash: 2.9%
Bonds: 6.1%
Market: 10.2%
Small Cap Value: 13.1%

Last 40 years…
Cash: 4.4%
Bonds: 7.3%
Market: 11.8%
Small Cap Value: 15.3%

Since we believe these are risk premiums, we cannot expect them to show up all the time (otherwise there would be no risk).
For example, last year (2018) none of these premiums showed up:

2018…
Cash: 1.8%
Bonds: 0%
Market: -4.8%
Small Cap Value: -13.8%

In 2018 cash beat bonds, bonds beat market, and market beat small cap value. Again, if these relationships were true every year, there would be no risk. If there was no risk, there would be no logical reason to expect reward. The below chart shows the frequency to which these various premiums have been negative in the US from 1927-2017. Data is from the Fama/French Data Library.

This defines our investment philosophy that guides our portfolio construction process. A philosophy that we believe makes intuitive sense (higher risk produces higher expected returns for those with the ability, willingness, and need to take such risk), and also aligns with historical evidence in both the US and globally. Yet since we can never be certain of the future (risk can be thought of as uncertainty), we must define our beliefs as a philosophy and not a law.

Jesse Blom is a licensed investment advisor and vice president of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse is a regular contributor to the Steady Options Newsletter and Lorintine Capital Blog.