If on the other hand you look in the mirror and you think you see Warren Buffett looking back, then we’re not the right firm for you.
Capitalism is what underpins the world’s economy and is overwhelmingly the most successful economic model that mankind has devised. The free market is a simple mechanism that brings together ideas for products and services, and the investment required to get them off the ground.
People who invest in an enterprise are taking a risk with their capital and are therefore entitled to share any financial rewards – just as they should accept any losses. This simple principle is followed in every corner of the world from the dusty markets of third-world villages to the boardrooms of the world’s richest corporations. In more sophisticated markets, the rules of this process are codified by formal capital markets and most investors participate through tightly regulated exchanges of shares and bonds.
We believe it is impossible to improve your investment return without taking more risk. In other words, the potential for financial loss you expose yourself to in taking a risk is also the reason you earn a return. There is good risk and bad risk and higher exposure to the right risk factors leads to higher expected returns, but is no guarantee of them. Risk is the premium investors pay for the expectation of a greater return.
Our role at Lexo is first to identify which risks offer consistently higher expected returns and which do not, and then to offer you exposure to those risks in a structured, disciplined and cost effective way.
Capital markets are the best mechanism we have to calculate the value of an asset. Many investors believe they are able to price assets more accurately than the market. They perform research and analysis to arrive at a price for an asset. If the market price is below their calculated price they might buy that asset to make a profit when it rises.
But however carefully they make their calculation; it is never more than an estimate upon which they base a prediction. Some estimates will be right; some estimates will be wrong.
Very few people are able to make consistently accurate estimates over a reasonable period of time so we do not use predictions about markets or prices in our portfolios. This principle applies across our investment philosophy which means we do not buy individual funds we think will outperform the market; or weight investments towards countries or regions we expect to do well. Instead we use investment funds with broad exposure to the whole market and allocate assets to countries in proportion to their relative size in the global market.
We therefore accept that the market, powered by the wealth-generating capability of capitalism, provides an adequate rate of return. We do not try to beat the market with predictions; instead we harness the returns of the market through discipline and structure.
Diversification is the principle of spreading your investment risk around. Our investment portfolios, therefore, hold the shares and bonds of many companies and governments in many countries around the world. Because we believe in the power of capital markets rather than individual predictions or judgements, we are able to invest our clients’ assets in many thousands of individual investments. This means the negative and positive influence of each individual investment is reduced, producing, on aggregate, less risk in our portfolios.
“Diversification is your buddy.”
— Merton Miller
Management fees, taxes, expenses and transaction costs incurred in the management of a portfolio have a direct impact on returns so managing costs is as important as managing investments. Good investment performance can be wiped out by high costs or a failure to seek tax efficiency. All other things beings equal, we seek the most cost-efficient route to market returns.
Passive investments generally cost less than the average actively managed investment by minimising trading costs and eliminating the costs of researching stocks.
Markets are frenetic, energetic, ever-changing entities that require people who are actively involved in them to be constantly plugged in and switched on. But this does not mean that as an investor you must be too. This is a mistake many investors make – believing that to be a successful investor they must have their finger on the pulse all the time.
The investment management industry and financial press perpetuates this myth with daily chatter that offers rolling tips, predictions, warnings, speculation and advice. This material is produced by competitive media and fund sales industries that survive by attracting attention to themselves. But virtually none of this information is of use to investors; in fact, it is distracting noise that can bully people into taking ill-advised actions. It is entertainment, not information.
Our investment philosophy is based on information, not noise or entertainment. Its roots are in the work of cool-headed academics with no vested interest in selling investments or filling column inches.
Investment styles are often categorised as active or passive. An active investor is one who makes decisions about holding one investment over another. Passive investors are willing to accept the market rate of return and usually enjoy paying smaller fees than active investors.
Our investment philosophy is passive to the extent that we are not making judgements on the relative merits of one investment over another, but we are not willing to accept the market rate (less fees) for our clients. Our investment process targets market-beating performance through structured exposure to dimensions of higher expected return, and uses methods of portfolio construction and implementation that enhance performance relative to the average investor.
Lexo is the trading name of Lexington Wealth Management Ltd. (registered number 05503144). Lexington Wealth Management Ltd. is authorised and regulated by the Financial Conduct Authority (No. 440099).
With investment, your capital is at risk. The value of your portfolio with Lexo can go down as well as up and you may get back less than you invest. It is important that you understand the risks. Lexo aims to provide information to help you make your own informed decision. It does not provide personal advice based on your circumstances. If you are unsure, please seek personal advice from Lexington Wealth.
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