Investment philosophy, process and outcomes

In some regards investing is like dieting. It only works if you have a good philosophy, good plan, and you stick to it over the long term. So what is our investment philosophy at the Suburban Economic Investor?

Investment philosophy

We are strategic, top-down investors. This means we invest according to macro-economic trends. We select relatively few investment asset classes, we abore excessive diversification and the notion of buy and hold for the long term. We don't trade; our ideal is 1-2 major investment decisions per year if that. Our heroes' are sage investors like Jim Rogers and Marc Faber who correctly picked commodities and China as boom investments (and the US as a poor one), and we smart enough manage those investments to protect downside. Our economist heroes' include Nouriel Roubini (RGE) and Paul Kasriel (NTRS).

So how does it work. Four simple steps based on foundation knowledge of financial and economic concepts.

1. Monitor and understand the global economic situation
2. Select asset classes likely to benefit (high positive economic value) over the medium term
3. Select individual investments within these asset classes
4. Manage entry, risk and exit to investments

For example. In 1999 our sage heroes' Rogers and Faber identified commodities as a group where at two decade generation lows. They also understood the central banks were printing excess money and that real rates would become negative which was bullish for commodities, and bearish for the USD. In 2003 they recognised China's entry to the WTO would spark a huge boom in that country. In 2006 these sage's went short financials recognising the imminent US housing bust. In 2007 they went long agriculture stocks. We don't pretend to be able to match this performance, but we do intend to 1) understand the fundamentals, 2) follow the global economy, 3) follow the sages by selecting good asset classes, 4) manage risk in our investments carefully.

Investment process versus outcomes

Investing is a probabilistic field in which both the likelihood and payoff for a decision in important (more on this later). In these fields the long-term investment philosophy and process are more important than short-term outcomes. We can control our investment philosophy, but we can't control short-term outcomes. Consider that in the following matrix:

We can't control the market, but we are aiming for an investment process which will deliver either deserved success or unlucky outcomes. We don't want to confuse blind luck with investing genius on our behalf. This 2 dimension by 2 dimension (2 x 2) matrix introduces both game theory and expected value concepts which are highly important to financial and life decision making. At its simplest we consider the performance what we can control (our investment process), with that which we can't control (market outcome). A useful concept for making all sorts of decisions with imperfect information.

Welcome to the Suburban Economic Investor

Hi there, and welcome to the SEI.

Why start the Suburban Economic Investor?

It took me a long time to work out that I was responsible for my own wealth, my own time, my own investments, my own career. About a decade in fact ... what a waste. Such lost opportunity. Over the last 8 years I've been on a knowledge quest in all areas covering the economy, investing, asset classes, business cycles and financial literacy. I think I've come a long way and want to share that information.

My main reason for sharing is to spare readers the lost opportunity that I (and my generation) have endured. I also have an eye to the next generation, particularly my two children who hopefully will be really getting into this blog circa 2014. I've got a lot of work to do between now and then.

So what is the Suburban Economic Investor about?

The SEI has two main themes.

1. SEI contains a concise series of blogs/articles that cover all the essential information one needs to truly make independent investment, financial and career decisions.
   
2. SEI surveys the global economy monthly, providing a concise information on the current state and future implications.

By combining these two themes, economic and investing theory with current economic state, readers should be able to form a good global picture and make informed decisions.

What does economics and investing have to do with wealth?

Here are my two simple definitions for economics and investing:

• Economics - relates to the allocation of scarce resources with alternative uses.
• Investing - relates to the allocation of scarce resources to enhance personal wealth
• Wealth - relates to the total value of an individuals possessions (friends, experiences, love, money, skills)
• Resources - time, capital (or money), energy, physical items, ideas
  

Whether we are aware of it or not, we invest our scarce resources using economic principles, in the hope that we will improve our overall wealth. If you don't know about economic, investing or wealth principles you may be missing out on some personal wealth.

How do I best use the Suburban Economic Investor?

I aim to publish around 1-2 articles per week, plus a quality monthly summary on the state of the global economy. The idea is that articles on this blog should explain the concepts covered in the global summary.

I recommend you visit my blog weekly, or link up via the RSS setting the article count to 1-2. Send my link to those you know that would like to learn more about the economy, investing and wealth; as well as the current state of the economy. If there is anything you'd like to know more about, drop me a message. I'll get around to publishing something on it.

Eventually you'll be full bottle on this stuff and getting into blogs from real economists and investors. When you do, be sure to share the link.

Enjoy!