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Investment Success Via Risk Management

Most days, Zeke Ashton works in jeans and T-shirts.

His Dallas office facilitates depth of thought and logic as he, his wife and one analyst navigate the Centaur Partners investment partnership and the Centaur Total Return mutual fund. Their setup is intentionally as far from Wall Street as possible.

Recently, the portfolio manager was kind enough to make the four-hour drive to lecture my students at Texas Lutheran University.

Right out of school, Ashton landed a job in Europe, assessing risk management needs for major industrial powerhouses.

This risk mitigation role cemented the mental framework and foundation for his career as a market beating investor.

Ashton's lecture to a packed audience focused on things he wished he knew as a college student. Although much was common sense, it warranted emphasis because it is easy to miss the obvious.

The discussion began as he told students to make their money last to age 90, if not 100, because of increasing life spans.

He added that the U.S. dollar has lost 95 percent of its purchasing power since 1915; and therefore, the wise investor must invest so assets overcome dilution of purchasing power.

Mr. Ashton offered that although financial success may seem like a monumental task, it is mainly math and discipline.

He advised that first you must get out - and stay out - of debt. Secondly, no matter what the market does, save and invest every month. Third, know what money gets you. Money does not get you love or happiness. Rather, it provides flexibility and options.

Ashton stated that in order to make money, you need brain power, time and effort.

He expanded that you don't need a high IQ. In fact, common sense and hard work were far more valuable. As an example, he said, the S&P 500 index averaged 15.3 percent between 1986 and 2001. During the same time, the genius organization, MENSA, compounded their funds a mere 2.5 percent per year. While Ashton said this, I felt better knowing I will never be invited to join MENSA.

Recognizing the young audience, Ashton explained that time may be the single best asset the students possess. He continued by saying, "Time is your friend, and you all have more than 25 years to invest."

He continued that if you combine time with patience you put the odds heavily in your favor. He said wise investors approach investing like batting practice, in which you get to patiently stand at home plate every day taking pitches until you see the perfect one.

Mr. Ashton then changed topics, quizzing the audience about what the stock market offers. He stated that stock markets allow business owners to raise money for expansion.

In the process, investors can achieve partial ownership in limitless business opportunities.

Ashton added that stock markets provide liquidity should you want to buy or sell your ownership.

However, liquidity is different than a fair or logical evaluation. Sometimes markets offer liquidity at very optimistic prices while other times it offers pessimistic prices. It is up to the knowledgeable investor to identify value.

Recognizing that valuation is an imprecise discipline, Ashton builds in a "margin of safety" saying the concept works equally well for investing and life in general. This value investing concept gives an investor such a large discount to what valuations should normally be, that even if you are quite wrong in your assumptions - you won't be hurt much. However, if you are approximately right, the upside is significant.

The fund manager further offered that wise investors must focus on their "circle of competency," which requires an ability to "know what you don't know."

This investment philosophy is complimented not by focusing on making money, but rather by decreasing risk and identifying what can go wrong.

As Ashton further assessed risk, he said you must know who you are as an investor's ability to tolerate volatility can be hardwired into their DNA.

Finally, in discussing risk, Ashton said you must understand it is not a one-size-fits-all concept. Risk is not an investing dial, in which you just crank up the risk to derive more return.

On the contrary, the smart investor recognizes the myriad of risks weighing upon a portfolio each day and invests with a margin of safety that you can deliver good returns while actually neutralizing overall risk.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

Originally published November 05 2014, Victoria Advocate