The following is an interview conducted with Sy Lippman & Rick Scott, co-founding partners of L&S Advisors, Inc. Sy & Rick have successfully managed portfolios for high-net-worth clients for over 30 years. In this interview they share some insight as to what distinguishes L&S and the philosophy that sets them apart from other asset managers.
Q: Could you explain why you believe risk management transcends everything?
SL: The impact of a bear market on a stock portfolio can be devastating to individual investors. It can take investors years to recover their losses. We believe preservation of assets during bear markets is the key to maintaining wealth.
When the market goes up, the truth is, just about anybody can make money. Managing prosperity is easy. What clients need is an advisor who can manage adversity, and not just stem losses. To battle adversity, an advisor needs to try to anticipate when things are going to implode.
Q: How do you define "Absolute return" and what impact does this have on an investor?
RS: There are several definitions of absolute return, but first one must understand the definition of relative return, which is simply the return of your portfolio relative to a given index benchmark. Absolute return does not use a specific benchmark. My firm defines absolute return as achieving positive results in absolutely any market condition, using absolutely any investment.
Within a relative return portfolio, if the benchmark index is down 40% and your account is down 35%, you essentially beat your benchmark by 5%, yet at the end of the day, you are still down 35%?
At L&S Advisors, we are obsessed with the pursuit of achieving positive performance for our clients in any given market condition.
Q: What are some of the issues with an over diversified portfolio?
RS: The primary objective at L&S Advisors is to achieve superior investment returns for our clients, not to track certain market indices. We believe that some money managers that fail to beat the performance of the S&P 500 due so because they emphasize diversification in the interest of minimizing risk. As a result investors end up with an over-diversified portfolio, resulting in mediocre performance, as the profitable companies make up too small a portion of the portfolio to have a significant impact. In the end, because clients hold so many positions, they end up with a very expensive exchange traded fund (ETF).
We adjust our portfolio exposure to pursue the best ideas wherever we see them, and limit our portfolios to only those ideas.
Q: How is a Registered Investment Advisor different than a Broker/Dealer?
SL: Does it seem appropriate for a client to be "advised" by someone selling products and earning commissions? No. Therefore, at L&S Advisors, there is no brokerage, no products to sell, no commissions or additional hidden compensation. We would also advise clients to choose advisors free of conflicts of interest, which we avoid. We are fee only. There are no bank, brokerage, insurance or estate plans. It's right there in our ADV-our SEC filing-and we provide it to every client. We focus all of our efforts on providing investment counsel to our clients, which we believe is a full time job.
Q: What effect has the recent market volatility had on investors' decision-making processes?
RS: After realizing the effects of the recent 2008/2009 market turmoil, many investors have taken what we believe are inappropriate actions at an inopportune time, and in hindsight probably wished they had planned accordingly for the global economic downturn we are now faced with. Many investors seem quick to say they have a "trusted advisor" whom they rely on to give them sound financial advice, yet some still found their portfolios decimated at the end of 2008. What we think is worse, is that a number of advisors may have been smart enough to see the turmoil coming, but unfortunately were constrained as to what they could do to try to protect client assets.
Q: How has L&S Advisors navigated the volatile markets of 2008 and 2009?
SL: Towards the end of 2007 we noticed that structural changes within certain sectors of the stock and bond markets were taking place, as well as a weakening credit market. During the summer of 2008, it was obvious to us that the worst had not yet materialized in the markets, and that this bear market was vastly different from recent bear markets. As a result, we prepared our portfolios for deterioration in all forms of credit, as well as the potential negative impacts on the broader economy.
Due to the size of our organization, we were able to be nimble and react quickly to the deteriorating market conditions. As a result, we made the tactical decision to move a significant allocation to cash, and kept it there through the first quarter of 2009.
Q: Is a buy-and-hold strategy still a viable approach to investing?
RS: Looking at the past decade of the Dow Jones Industrial Average, I believe it is clear that the traditional buy-and-hold school of thought is considerably less effective. In short, the game has changed.
The Philosophy of asset allocations and buying companies with stable fundamentals and historic returns has been challenged.
Today's changing environment forces us to modernize our approach and strategies. The market now moves faster than it ever has. Anyone who sits and waits could simply miss the potential opportunities. To outperform the market, an advisor must think tactically.
At the same time that we are actively managing risk within our clients' portfolios, we are seeking investment opportunities across global capital markets.
We respond to market conditions and quickly revise strategies, because one must employ tactical allocations as opposed to the static approaches of the major brokerage and investment houses.
Q: What is tactical diversification and is it just a fancy term for "Market timing"?
SL: This is now the longest recession since the 1930's. We're not overly concerned, however, as a recession doesn't typically end until four to six months after the final bear market low is in place. The point is that it's not our goal to "pick the market bottom," which is obvious only in 20/20 hindsight. We need to recognize good buying opportunities and attractive valuations, and start to adjust allocations according to the level of risk we see going forward.
We define tactical diversification as making swift concentrated purchases when we see an opportunity present itself. Our strategy allows us the flexibility within portfolio construction to consider all sectors globally, and emphasize investments in healthy industries with specific stocks and avoid those where we see trouble on the horizon. Our investment strategies lack any global, sector, or capitalization restrictions, and as a result we believe we can excel in a variety of market conditions without timing the market.
