Investment Counsel

8031 M-15
Clarkston, MI 48348
Phone: (800) 689-7897
Fax: (248) 625-7847

• About Us
  • Our History
  • Management Team
  • Investment Philosophy
  • Our Clients
• Services
• What Makes Us Different
• Articles & Resources
• The Investment Letter

Investment Counsel banner...

Father Knows Best: Common Sense Never Goes Out of Style

Volume 76, No.1

Upon reviewing our old correspondence files, the following letter was discovered. We believe it was written in the 1950s, the author is only known as “Your Loving Father”.

Dear Son:

Now that you are on your own, I would like to impart some investment advice. Part of what follows was told to me by others but most has been learned the hard way, that is, by trial and error. Perhaps you will be spared repeating some of my follies.

The modest amount your mother and I have given you represents a start. In order to invest, it is necessary first to save. A part of all income (including investment income) should be saved on a regular basis. If you think of saving as paying yourself first, it is easier to set aside a part of your income. Why should you pay the butcher, the baker and the candlestick maker before you pay yourself? After all, you are not working for them (or are you?). Saving requires self-discipline of all of us, no matter the age.

Your greatest investment ally is the time still ahead of you. Regular thrift habits will build a respectable financial nest egg. There is an old saying, “A fool and his money are soon parted.” I used to laugh at this worn cliché, but no more. I have found every word to be more true with each passing day. Now that you have a savings program, it is time to give thought to the other part of the equation, investing.

Let us consider the value of two types of assets: those which grow and those which waste. We might label such things as ownership of real estate, or of thriving businesses, as assets with growing values. Then, there are those assets the value of which declines from the very first day of purchase. Automobiles and appliances come to mind. It is well to ask yourself which type of asset you are purchasing, the growing or the wasting type. Do not be obsessed by the acquisition of showy, wasting assets, just to impress your friends. Believe me, this obsession will keep you poor.

Seven places to put investment dollars present themselves. Five involve fixed-dollar returns: Bank deposits, savings and loan accounts, credit unions, bonds and life insurance. Two involve fluctuating dollar returns: real estate and stocks. In determining the best investment mix, consider these four risks; (1) dying too soon, (2) living too long, (3) inflation, and (4) deflation. In building for the future, it is well to use a four-corner plan: Cash reserves for small emergencies, life insurance for premature death, a systematic savings program during working years, and investment diversified between real estate, stocks and bonds. Investments which tend to grow, year after year, will reduce the financial risks of longevity. It has been my experience that level-premium term life insurance provides the most protection per premium dollar. (Remember, only through life insurance can you create an estate that you have not had time to save.) Do not put all your savings into fixed-dollar investments such as bonds, certificates of deposits and the like.

Do not put all your money into one type of asset as there is no such thing as a riskproof investment. Diversify! Because you are beginning an investment program, emphasize capital appreciation rather than current income. The shares of growing corporate enterprises offer an excellent opportunity to make your capital grow. Buying a home in a good location and at a reasonable price is a sound investment and a tax shelter as well.

Keep learning. A diploma is just the beginning, not the end of knowledge. Learn from experience as well as from books. Learn from your mistakes as well as your successes. Do not be discouraged; you may be surprised how well things turn out if you persist along a well-chosen, yet difficult, path. Lasting success is often built on adversity and extra application to a hard problem. You will hear much about the easy successes of others; often, these are only partially true or of a temporary nature. Another worn phrase, “Easy come, easy go” has meaning here. Do not be afraid of working hard; there is more enjoyment in it than you have been led to believe. Beware of get-rich-quick schemes. They are either full of peril or fraudulent. But enough of this moralizing; I will try to be more specific.

When making investments, get the best possible investment advice. Beginning equity investments may be made in one of the well-managed, no-load investment trusts (mutual fund.) If you select a bank trust department or Investment Manager, I would recommend that you choose an investment advisory-type of account in which you continue to retain some control over your assets and are brought into investment decisions.

Do not buy low-priced, speculative securities in the hope of a quick profit Stick to high-quality companies with established records of growth. Most of the time the long way around is the short way home. Successful investing requires patience.

Always make investment considerations paramount. Do not let tax considerations be the primary influence in arriving at a conclusion as to whether you sell any of your securities.

Never buy securities on margin. If you run into financial reverses beyond your contingency savings, then you may need to borrow money, using your securities as collateral. Remember that excessive borrowing is the stuff from which bankruptcies are made.

Do not speculate in any type of commodities, options or get into any real estate, oil wells, cattle -2- raising, or similar types of partnerships which promise you a tax savings. Usually, you lose your shirt in such deals. You get the tax savings, but often at the expense of losing your capital.

Once or twice out of every four or five years, you can count on a period of irregular or declining stock prices. Keep some of your money as a reserve, either in U.S. Treasury bills or in a daily interest savings account. Then you can buy stocks in one of the periods when stock prices are low.

In the long run, you will probably do better if you buy shares in a company which is growing steadily at a good rate and accept a lower-than-average current return.

In making bond investments, be guided by the going rate on U.S. Treasury obligations and buy only investment-grade issues. In inflationary times, it is best to keep bond maturities short, that is, within five years.

Finally, never let a salesman talk you into anything. Ask lots of questions and make up your own mind and you will get along alright!

Your loving Father

One of the things that impressed us most about this letter is how amazingly little sound investment advice has changed over the past 50 years. Half a century has not altered the common sense and encouragement of this father’s good advice: Save, Diversify, Growth, Control Risk and above all, have Patience.

Common Sense Investing Today

Throughout 2006, the stock market produced an impressive and steady growth. In fact, there were few periods when the market did anything but consistently grow in value.

This consistency is even more impressive when one considers the volatile back drop of events throughout which it occurred: volatile energy prices, housing challenges, a huge change in political environment, and war.

The stability of the US economy is nothing short of spectacular.

The media has had its day, infusing fear with the 416 point drop in the Dow Jones Industrial average, but the facts speak for themselves. The markets will have additional volatility (they always have and they always will) but this is no reason to panic or lose our common sense perspective due to a media event.

We continue to be concerned about the slowing US economy and are aware the current expansion is getting a little long in the tooth. However, we are very encouraged by the level of relative low risk in the stock markets today. We continue to believe there are exceptional values in the larger, more established, “blue chip” domestic companies.

The current low level of interest rates do not excite us to recommend long-term maturity bonds. With the current inverted yield curve (short-term interest rates greater than long-term interest rates), we recommend for those with current money market balances or bond maturities to be patient and accept the short-term returns of 4% to 5% that money markets provide with no principle risk.

With the run up of the stock market the past few years, we also believe it is prudent to review one’s total allocation towards stocks to ensure the proper risk level is taken.