To help you understand how we think about investing, here are some of our core investing beliefs:

Respect the markets.  Investing is an exceptionally demanding endeavor that attracts a disproportionate number of the most capable people on the planet.  However, the vast majority of investors underperform the market because they lack the knowledge, the emotional discipline, and/or the dedication required to excel.  At Palo Capital, we believe we have the qualities that are necessary for success.  However, we have learned over time that whenever we think we have the market figured out, the market always teaches us a new lesson.

Don’t settle for average performance.  Despite how difficult it is to beat the market averages, there are always investment managers who regularly outperform the market.  We at Palo Capital expect to be in that group.  If there comes a time when we cannot regularly outperform, then that is when our personal money and our client’s money should be managed by someone who can.

Equity bias.  Because equities almost always outperform fixed income investments over timeframes of at least five years, we believe that portfolios for investors with investment timeframes of five years or longer should, under most market conditions, be heavily weighted towards equities.

Get the big moves right.  A manager’s investment performance is largely determined by whether or not the manager catches the really big moves for the market and for specific market sectors.  In 2005, if an investor was overweight energy stocks, she/he almost certainly outperformed, and if not, she/he probably underperformed.  In most markets, there is at least one very powerful trend for which it is essential to be on board. If you can get on board early, that is great, but with the really big moves, you don’t even have to be early to do very well.

Beware “style-box” limitations.  Markets rotate their rewards among stocks from different investment styles and market capitalizations.  Almost all investment managers that focus on a single style or capitalization range suffer regular periods of underperformance when their approach is out of favor.  The freedom and ability to change “style boxes” as market conditions dictate is essential to achieving consistent outperformance through changing markets. 

Focus on the long-term.  In the short term, markets and stocks bounce around for reasons that are mostly unpredictable.  It is actually easier and much more profitable to focus on determining where a sector or a company will be in a few years than where a stock will be in a few months. 

Focus on after-tax returns.  Although it may not be feasible to measure investment managers based on after-tax returns, after-tax-returns are what smart investors care most about at the end of the day.  Investing strategies should make the taxman our partner on our losers, but let our gains compound as long as possible before sharing them with the government.