Our approach to investing can best be summed up in a former President's charge that "We must adjust to changing times and still hold to unchanging principles." Our unchanging principles include the recognition that stocks represent ownership interests in underlying businesses and that the value of these businesses are determined by the amount of cash they will generate in the future. However, the research and analytical process required to predict future cash flows requires constant adjustment to reflect the changing nature of the competitive and economic landscape.

        As a result, we must always be on the lookout for changes that could dramatically alter the value of companies we might own. For example, while it is widely assumed that earnings for most companies grow over time, the nature of competition and capitalism is such that a significant percentage of companies will in fact earn less money in the future than today. Only a decade or so ago large and profitable companies like General Motors, Kodak, Citigroup, and Xerox were considered reliable blue-chip investments. However, since then, the share prices of these "safe" businesses have declined an average of 89% and three of the four companies reported record losses in 2009. When studying potential investments, we try to look beyond reputation and past results, focusing instead on factors that might increase durability and adaptability, such as balance sheet strength, competitive advantages, risk of obsolescence, regulatory risk, returns on capital, pricing power, management incentives, and geographic and product diversification.

        Having just come through one of the worst decades for stock investors during the last century, commentators and the public are more pessimistic than ever. The economy is uncertain and most investors feel anxious and discouraged. For long-term investors, this combination should be as welcome as a sale at the grocery store. After all, pessimism creates low prices and low prices lead to high returns. In the words of the great investor Sir John Templeton, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria."

1.  Are you a Fiduciary?  If the response from the prospective advisor is not simply a quick "yes".... then go elsewhere.  If they won't show you the document where this is stated, or will not provide you a signed copy, then move on.  Among other directives, a Fiduciary is obligated to act in the best interests of his/her client all the time, not just when convenient or possible to do so. There are numerous restrictive conditions in many firms that prohibit an individual advisor from committing to fiduciary responsibilities in far too many investment firms that offer investment services. 

2.  Who is your target client?  All too often so called advisors try to be all things to all people.  Understand the vast differences between a "money manager" and the role of a broker.  Ask the advisor to inform you in detail of his/her investment philosophy.  Find out how they think, what their typical portfolio may look like if you hire them.  Don't just assume that they do know everything about everything.

3.  How do you get paid?  This may be the most important question you can ask.  If the advisor is paid by those in whose product they invest, or is compensated by transactional commissions, look elsewhere.  The advisor should be compensated in a fee only manner, which perfectly aligns their own source of increased revenue perfectly with increasing your base of wealth.  Incentives in place that alter this focus can only increase the investors cost, which results in lower performance.

4.  Where is my money kept?  Had this question only been asked by those whose futures were sadly ruined in the Maddoff scandal and others like it, so many investors might have saved their fortunes.  Your money and your adviser should be separate, with your assets held by an authorized and neutral third party custodian.  If the money you place with an advisor is not fully insured by a custodial/trust firm authorized to do so, then walk away quickly.

5.  What conflicts of interest do you have?  You, the investor, have a right to know when conflicts of interest exist with any advisor.  Know if the advisor sells proprietary products.  Many advisors collect fees from the investor, and double-dip by getting commissions and/or other types of fees from those firms whose products they sell.  Soft-dollar cost savings [e.g. reduction in costs for services rendered to the advisor] too often direct investments. Participation in "sales incentive bonuses" create biases to the investor's detriment.  Investment banking relationships can be negatively influential.  Restrictive "selling agreements for shelf-space fees" can substantially reduce opportunity of higher returns. If you sense any attempt to skirt discussion about conflicts of interest, keep asking questions until you are satisfied. Ask for your advisors ADV Part II, which is a SEC Regulatory Document that discloses services, fees and investment strategies.  But continue to ask questions until you are comfortable that no conflicts exist, or at least until you are aware of them.

    Being thorough in one's investigative process for determining with whom you will be best served in managing your money will potentially save some sorrowful regrets later.  Be an informed investor.......ask a lot of questions.