July marked the five-year anniversary of the formation of Talbot Financial, LLC. In a series of questions that follow, we asked Randy to reflect on his experiences over these past five years and offer a few insights as to how he thinks about opportunities in the coming years.
Q: What has surprised you the most about managing a family office investment management business, versus being the CEO of a large company?
A: The most surprising thing to me has been how similar this work is to my corporate career of leading insurance and brokerage companies. Comparable to running a large company, the market perception of the worth of the holdings in our investment portfolio often diverges greatly from our internal views (albeit a much longer-term time horizon) of the intrinsic value of the companies and real estate we own.
My job now, as it was back then, is to properly assess the value of the businesses we invest in to capitalize on the best opportunities. The old adage coined by Benjamin Graham comes to mind: “In the short run, the market is a voting machine, but the in the long run, it is a weighing machine.”
Q: What are some lessons you have learned about investing?
A: I think a central lesson I have learned over time is not to react with the crowd to volatile market swings. The exception being when and if your research identifies a fundamental shift in valuation in your investment holdings, or in the companies of stocks we may want to buy. This discipline is especially important when it comes to building and owning real estate. Quality research gives you confidence in what you own.
Q: You have consistently invested in stocks of large companies. Why is that the case?
A: Bigger companies have enjoy outsized advantages today greater than at any other time I have seen throughout my entire career, including:
· Access to borrowing money (i.e., issuing debt) at historically low interest rates
· Technology and process improvements to improve efficiencies and drive down costs
· Growth through scalable operating and customer platforms due to cloud computing and storage
· Massive advertising leverage through social networks, search engines and data warehouses
Q: What would need to change for you to consider investing in stocks of smaller companies or bonds?
A: I don’t limit my investment strategy based on the size of a company, but rather, I focus on companies that have sustainable value. The key question I consider is: “in the long run, will I get my money back from the investment?” If valuation and market place advantages shift to smaller companies in general, and if interest rates rise enough to allow highly rated corporate or municipal bonds yields to meet longer-term return targets, I would certainly look more closely at adding these asset classes to investment portfolios.
Q: What are your views on investing in real estate?
A: I have invested personally and alongside other clients of Talbot Financial in several real estate projects through a combination of equity and debt. A large advantage of owning real estate in times like these when the cost of debt is very low is that we can secure long-term loans at historically low interest rates. In addition, we conduct thorough due diligence on each property and the property managers and only invest in projects that we believe will offer meaningful appreciation in property value over time.
It is important to keep in mind than the time horizon for investing in real estate should be at least 10 years; and therefore, a long and patient view is necessary to invest in income producing real estate projects. Our expectation is for a reasonable and dependable return over time of our invested capital.
Q: How do you measure success for yourself and clients of Talbot Financial?
A: Our job is to provide clients with excellent service and make smart investment decisions. Delivering on these two imperatives every day will go a long way toward achieving objectives for client families and the team at Talbot Financial.
Q: What is your investment outlook in the year ahead?
A: As I look forward, I believe the “stay the course” mentality will win the day. At this point in time, I am not compelled to aggressively adjust the composition of the investment portfolios, although we recognize the recent pick-up in market volatility. Overall, I continue to believe we should own companies with the strongest balance sheets, sustainable earnings and products that people need and want.
Furthermore, the current dividend yield on the investment portfolios is very attractive, especially when measured against other asset classes. In summary, our goal is to have a portfolio that is built to last.