The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
Choosing Investments for a Lifetime, Not the Next 20 Minutes
07/31/2012 8:15 am EST
New York-based advisor Jonathan Satovsky explains how he steers clients toward investments that can weather market storms, rather than trying to catch yesterday’s hot trend. He also shares some views on funds he uses frequently.
Kate Stalter: Today, my guest is Jonathan Satovsky of Satovsky Asset Management. Jonathan, you and I have spoken before, and one of the aspects that I found very interesting was your idea that clients should have the spending target of 3% of their portfolio. So in other words, they don’t need to count on some kind of outsized returns that may be hard to get in these volatile markets that we have been experiencing lately.
Can you start out by discussing how you are managing client portfolios in these market conditions?
Jonathan Satovsky: I think that the concept of a 3% spend rate is prevailing not just in these times, but generally speaking, for several reasons.
One is longevity risk, which is something that has become a much greater issue, and has been clearly part of the fiscal problems in the country. When life expectancy was 67, it was very easy to retire at 65. But now with life expectancy going to 83 to 87 or beyond, life expectancy is a very big issue.
The second thing is: Spending rates tend to drift up in retirement beyond what people expect, because people like to travel, people have higher health-care expenses than they can factor in a normal budget.
Dealing with budgeting in people’s lives is one of the least fun, least favorable things that I think people enjoy talking about, because every year it’s like asking for forgiveness. “Well, this year I had an extra trip,” or, “This year I had something go wrong with my house,” or, “This year I had this.” There is always an excuse of why they blew their budget.
But going back to the simple idea of a 3% spend rate, it enables people to have a sustainable portfolio to insulate them from inflation and taxes over a long period of time, and deal with boom and bust cycles without having to get caught up in the behavioral risk that becomes exponentially more prevalent in times like this.
Kate Stalter: Let’s talk a little bit about some of the specifics. How do go about managing the client portfolios to steer them toward having the wherewithal to achieve this 3% target? I know you have separately managed accounts, and that you also use a number of different actively managed mutual funds. Let’s talk a little bit about how you do this.
Jonathan Satovsky: So everyone has a different preference, everyone has different tastes. Analogizing it to going to the supermarket, if someone goes to the supermarket, everyone has a different flavor in tomato or pasta sauce. Everyone doesn’t like the same style; everyone doesn’t have the same tastes.
So what we try to do is really get to understand the client’s understanding and preferences. And then, like custom tailoring a suit, put together an assortment of asset classes, whether they be actively managed mutual funds, or indexes, or even individual stocks or bonds that people can be comfortable sitting on, ideally, and living their lives without being caught up in the day-to-day headline news and reacting to. Because they have a greater understanding of what they own that’s well suited to them, and they would understand how they’ll perform and the magnitude of that performance.
So for example, if I like global microcaps—which is a category we’ve spoken about at great lengths in the past—we can buy an individual handful of names. But people have to be aware that quarter-to-quarter, individual companies in global microcaps, like the surf wear company Billabong (Australia: BBG), could drop 50% in a quarter.
Well, how much of your assets are you going to be comfortable seeing decline 50% in one quarter? Some younger people or some older people that have a higher risk tolerance may be OK with that, but others may be more comfortable having a fund that’s a portfolio of 150 to 200 names that may have 10% downside in a quarter.
That’s still not fun, but not nearly as devastating, and doesn’t have the consequences to your balance sheet and your finances, where that you are forced to sell something at an inopportune point in time.
Then the third part of that is just right-sizing that position. So whether it’s an individual stock, or whether it’s a fund, is trying to make sure that the percentage exposure that someone has is ideally sized, where they are not going to have to sell it at an opportune point in time if they need money in a pinch earlier than expected.
Because even in retirement, if someone retires when they are 65, the reality is that they aren’t going to use all of their money in year one, they are going to use some of their money 15 or 20 years from now. So if they could mentally compartmentalize some of their resources as matching assets and liability, the time in which they are going to use it, then they could say, “You know what? I get it! If I’m not going to use this until 2020, would I rather own cash at 0%, or would I be more comfortable having equity ownership in a business that has the potential to grow three, five, tenfold over the next ten to 15 years?”|pagebreak|
Kate Stalter: Let’s drill down a little bit further, and talk about maybe some of the funds or investments you might use in some of these specific examples, where the clients might have varying degrees of risk tolerance.
Jonathan Satovsky: One of the greatest lessons that I’ve learned was from a manager by the name of Jean-Marie Eveillard, who started at a firm called Arnold Bleichroeder back in the late 1970s, and had a Benjamin Graham value-oriented approach that he had effectuated over the course of the last 30 years. And he had somewhat of a dual discipline of:
- I need to make sure that I can outperform cash, because clearly people don’t need to invest. They can leave their money in cash.
- To outperform the equity markets over a market cycle. And that is not the typical mandate that you would hear from a mutual-fund manager; that may be more indicative of what you would hear from a hedge-fund manager, but not from a mutual-fund manager. And the simple idea was, he said, “Look, you can’t eat relative returns.”
If the market is down 35% and you’re down 30%, it’s not satisfying if you have to pay your bills. So he took that discipline very seriously, and he achieved great success, earning close to 15% a year for the last 30 years. So I have used his First Eagle Global (SGENX) as well as the successor, what’s called IVA Worldwide (IVWAX), with great success over the years.
But often I say the most important thing is to have investors understand what they own. One of the key attributes of this particular investment is it’s not benchmark-oriented. It’s not following the herd, so there will be periods that it massively underperforms the benchmarks, and it’s going to take a really strong stomach for investors to sit still.
And you can just highlight even the late 90s, when there was a period from 1997 to 1999 when Jean-Marie underperformed the benchmarks severely because the tech bubble was booming and he was making miniscule returns, and 72% of his investors left, because he wasn’t keeping up with other investments that could have been made at that point in time. Even though he had a 20-year track record at 15% a year, people abandoned him.
Of course, after 2000 and 2002, then the vast majority of the markets declined 50% to 70%, and he made 10%, 10%, 10% [in each of those years]—and all of the money came flooding back and then some.
So it’s funny, it goes back to the same behavioral risks that investors generally want to be at whatever party happened yesterday. So people are always trend following or trend chasing. So many of the investors, unfortunately, after losing 50% to 70% of their money in the tech bubble, came back to the value investors and said, “OK, you’re smart again.”
It will be interesting to see if we continue to have any dramatic period of underperformance, whether investors would again chase the drama and the dramatic action of what’s happening at the moment, and abandon the more valued discipline styles that are looking out over a market cycle, and trying to take a disciplined approach. But only time will tell.
Kate Stalter: As you and I have talked about before, it does seem that a lot of the news reports that people see may, inadvertently at least, encourage them to be chasing what is hot at any given moment.
Jonathan Satovsky: Listen, we are all human. We are not generally wired to be good investors. There is an intellectual and an emotional response to investing—what intellectually makes sense and emotionally feels right is not intuitively how people achieve great investment success. It’s often the opposite.
But knowing that many investors, in order to stay disciplined and stay committed to a long-term process, get that magnetic pull toward what’s popular at a moment. I happen to be a huge fan of Apple (AAPL) and Google (GOOG) and technology and advancement, and these are not traditionally the kinds of things that are owned by value investors, because technology changes very quickly.
For the purpose of giving people exposure to things that they use in their daily lives, you know even teaching my own children about investing, and using a quasi-Warren Buffett or Peter Lynch approach of buying what you know and understand: If your children, 13 years of age, is using Apple products and using Gmail and searching everything on Google, buy him several shares to get him informed and educated about what’s happening in the world. If that’s the way to get them involved and understanding the world better.
I think that for part of the population, if they have a good core portfolio and they want exposure to that, we try to give 10% leeway, even 20% leeway at times to drift into things that fit those emotional pulls. So if they make any huge mistakes that it doesn’t have any gargantuan repercussions on their entire balance sheet. That they don’t shoot themselves in the foot to too great of an extent.|pagebreak|
Kate Stalter: I want to follow up on that with the idea of small caps, micro caps. I know that there are some funds that you’ve used over the years for particular clients, not for everybody. Can you say a little bit about that?
Jonathan Satovsky: Well, we’ve had very good success with Robert Gardiner of Grandeur Peak, which was a former investor at Wasatch for many, many years. They’ve started a new firm in Utah that scours the universe, searching through the 70,000 publicly traded companies to find the 1% to 2% needles in the haystack of really great companies that are inspiring and growing.
People get so pessimistic about the geopolitics in the world, and it’s actually very inspiring when you do travel—and I’ve been fortunate to travel a little bit in my own life—when you travel and you see things that are going on. There are a lot of inspiring people and inspiring businesses and inspiring things.
As one thing that he had said to me over the years that really struck me is, he said in his 30+ years of investing, the one minute he spent talking about geopolitics was one minute too much. Certainly everyone wants to spend 99% of their time, like cocktail conversation, talking about geopolitics. And it’s, it’s more fun talking about people that are just keeping their head down and doing great things and making an impact in a positive way.
Kate Stalter: Let me ask you this, Jonathan: In general, just given what we’ve been seeing—even as we’re speaking today, we had another one of these volatile days on Wall Street that have become all too common. How are you advising your clients today in terms of weathering some of these storms?
Jonathan Satovsky: Well, I think that when you’re living through it at the moment, it always feels the magnitude is on the precipice of another 2008-2009 occurrence.
I think it opened people’s imaginations to anything is possible. Black swans are around every corner, and people are forgetting that this has been the natural course of things back to 1800. From 1800 to now, the markets have experienced declines of 5% three times a year, 10% once a year, and 20% every two-and-a-half years. That’s the nature of the market.
That being said, I think that the demographic of our country and most people that come to financial advisors are generally in their 50s, 60s, and 70s. So as a tendency that group, and that demographic, has become more sensitive to that volatility. When they were in their 30s and 40s, they were a little less sensitive to it. Now that they’re in their 50s, 60s, and 70s, they’re so much more sensitive to it; it has driven people to have a much greater demand for income-oriented things, whether it be bonds or dividend paying stocks or MLPs.
So we have drifted a little bit more toward income-oriented things. If you can cover your 3% spend rate with the dividends and interest in your portfolio, then you have room and a margin of safety to be able to go out and take some risk in other places.
And again, your biggest key of success there is you avoid being a forced seller of an asset. Because if you’re covering your spend rate from what you’re earning, then it gives you much greater staying power.
That being said, it doesn’t necessarily mean that people are investing to give them the highest return possible. But people need to give themselves the best sleep-at-night quotient. The most important thing is to help people understand the magnitude and the range of possibilities.
And to help them sleep at night, we may hold 10% to 20% of their portfolio in cash. It sounds ridiculous, because clearly at 0% interest, people aren’t going to achieve their goals, but people aren’t going to achieve their goals if they are 100% invested and we hit another 20% decline and they sell either.
So, if we target a more moderate return and/or put them in a position when they feel most sick about the markets and want to sell, that they have enough latitude to lean into the wind and buy. That is the ideal scenario, but the execution on that and twisting clients’ arms to convince someone to edge up their risk when things look scariest is certainly not an easy thing to do, particularly with the headline news and all the realities of what seems to me is a very fragile banking system around the world at the moment.
Kate Stalter: Well, a lot of good reminders there. Really appreciate speaking with you again today, Jonathan. Hope to have you back on here sometime and great words of wisdom for us today. Thank you so much.
Jonathan Satovsky: Thank you very much, and not to leave on a bad note. On a positive note, I should just say that if people can constantly summon the idea and think about longevity, even if you’re 60 or 70, that you may have another 20-plus years. No matter how bad the present looks, the future is always going to be better than today. It just may take a little time.
It’s the optimism of Warren Buffett that you should summon up. That you’re investing for a lifetime, and taking a measuring stick like a baseball game every minute. It’s not like you quit the game in the third inning. It’s a marathon, it’s not a sprint.
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