Preservation of Capital is Critical

  • The best way to compound is avoid major drawdowns

  • Historically, the equity markets have declined 32.4% every 4.1 years

  • If you lose 32%, you need a 47% increase to return to break-even

Markets are Cyclical and will Regress to the Mean Over Time

  • Competition drives mean reversion

    • return on invested capital will regress to the cost of capital

  • Human nature is pro-cyclical (buy High, sell low) while fundamentals are counter-cyclical

  • Risk Premiums and expected returns are not static but vary over time

Value Investing has Outperformed the Overall Market since 1926 

  • In the short-term, asset prices are volatile and can be temporarily driven from their intrinsic value

  • In the long-run valuations regress-to-the mean

  • An asset’s long-term expected return and risk-reward are best determined by valuation measures

​Keep Expenses and Tax-burden Low

  • Wall Street Charges too much for poor performance

    • Most Domestic stock funds under-performed their benchmark over the past five years (Standards and Poor's SPIVA US Scorecard)

  • According to Morningstar, the average expense ratio of actively managed stock funds is 1.39% (January 2015)

  • Historically, equities compounded at approximately 6.5% before inflation (Ibbotson)

    • Management expense ratios are 21.4% of historic real return

    • $100,000 invested for 25 years at 6.5% is:  $482,770

    • $100,000 invested for 25 years at 5.1% is:   $346,791

      • Money Management Fee over 20 years:  $135,979


Free Markets Capitalism is the best economic system to allocate resources (land, labor and capital).  Low taxes,  low regulation and a stable currency allow entrepreneurs to compete and innovate. This competition and innovation leads to increased productivity, real GDP growth and increased living standards. As responsible investment managers, our goal is to grow clients' wealth by maintaining a diversified and value-driven investment portfolio, managing risk and preserving capital in bear markets.  We strongly believe capital preservation is essential to long-term wealth accumulation.

​Capital Preservation:
Since 1960, the stock market has averaged a 32.4% decline every 4.3 years, requiring 48% appreciation to return to breakeven. Capital preservation and avoiding such major drawdowns is critical to long-term wealth accumulation. Also, preserving capital in bear markets yields the necessary cash to exploit the great values available at major market lows.

Regression to the Mean:
Bear markets are inevitable because profitability, growth rates and valuation are cyclical and will “Regress to the Mean” overtime.  Competition drives this mean reversion. High returns on investment attract competition and excess capacity, which reduces future levels of profitability. Overtime, a firm's return on investment will equal their cost of capital (the level of profitability will regress to the cost of their capital).  While fundamentals are cyclical, many investors driven by human nature (fear and greed) extrapolate current fundamentals into the future, paying too much for peak earnings and pushing valuation levels away from their intrinsic value. When margins and profits regress to the mean, investors are disappointed, stocks decline and a bear market ensues, pushing valuation and profitability levels back to average or below-average levels.

Historically, stocks have provided a return of 9.5% (6.5% real). In our view, the market's long-run expected return and risk/reward are best determined by valuation measures (for example, cyclically adjusted earnings, CAPE, Tobin Q, Book Value, MV/GDP). Because stocks are the present value of future cash flows, and over time the growth rate of those cash flows will  regress to the mean, what one pays for that cash flow stream is critical in determining the future long-run return. 

Asset Allocation:
Since markets are cyclical and will regress to the mean over time, an asset allocation should not be static (ie.,100% stock or 60% equity/40% bonds); it should be driven by the market's long-run risk/reward that is best determined by valuation measures.  ​As the market cycle matures and the risk-reward deteriorates, portfolios should mitigate risk by increasing asset diversification, reducing equity exposure and limiting portfolio volatility. Conversely, after a bear market, when stocks are inexpensive, profits are depressed and investor expectations are low, portfolios should increase equity concentration and accept greater portfolio volatility.

While no on can predict the future, we know that fundamentals are cyclical and the market's risk-reward varies over time. To grow our client's savings in a responsible manner, we maintain a long-term approach that creates value-driven, diversified and balanced portfolios. 

Responsible Investment Management                                    

                                                                                                                                                                                                                                                                                                       financial advisors in Summit, NJ                                  

Manley Capital Management, LLC

Capital preservation is critical to investment success

Markets are cyclical and regress to the mean

Valuations best determine future returns