"To be ignorant of what occurred before you were born is to remain always a child."


Please don't expect to read highly technical definitions in our brief glossary, which is intended to explain certain operational terms we use in our industry and certain philosophical terms we may use in discussing the global economy and markets. These observations on certain words and phrases that we have used in our website are rather more statements of my personal opinion so that you may understand better the way that I see the investment world and the opportunities it holds. The words themselves may be very familiar to most of our visitors; my take on these words may not be.

Bonds - While I generally favor equity investments, I also recognize that an allocation to bonds can be important for many investors. The right types of bond holdings can lend stability to an investment portfolio at the cost of more modest returns. While we do not specialize in bonds, we sometimes make selective investments in this asset class to fill particular needs within a portfolio, including foreign currency bonds to take advantage of currency movements. I look on bonds as a low-risk investment for those seeking income, particularly in a laddered structure. As a pure investment, the returns can often be unsatisfactory after taxes and inflation.

Capitalism - Very simply: capitalism is the economic side of individual liberty, the ability of individuals to make free decisions concerning the wealth they have accumulated. And on a practical basis, no economic alternative can do a better job of channeling resources to where they are needed.

Cash Flows - Companies live and die by cash flow. Professional investors understand that there is a stark distinction between profits (often illusory) and cash flows. Odd though it may seem, companies can "grow" into bankruptcy. We try to identify enterprises who either generate substantial "excess" cash through their operations or whose balance sheets contain more than sufficient liquidity to sustain the company through difficult periods.

Contrarian - Contrarian investments will, by definition, behave differently to other investments in the financial marketplace. We don't want to be knee-jerk contrarians, necessarily selling what others are buying, or buying what others are selling. But lopsided sentiment can often be a useful indicator that a market or sector is close to a top or bottom, and as contrarians, we often search among such investments for opportunities. Another sense of "contrary" involves investments that tend to move in a contrary manner to the broad market, or, in technical parlance, that are "non-correlated". Precious metals and commodities generally have low correlations as do emerging markets. For people of means, true diversification requires a respectable allocation to such non-correlated asset classes.

Custodian - In our industry the custodian firm is the company that actually holds all the assets in an account. They maintain the books and records, ensuring that all credits and debits are appropriately noted. We provide trade instructions to the Custodian on behalf of our clients and in accordance with the parameters established for the account. We employ custodians In the United States and Europe.

Cyclical - This word is often used in an investment context without its implications being fully appreciated. Most companies and industries are "cyclical" to some degree (although some, like drug companies, are obviously not), but determining the cycle is much more art than science. At our firm we recognize that some companies may be out of favor, perhaps for an extended period. Such companies become "value investments" in time according to our perceptions. Accordingly, many of our investments will be "cyclical" and will have been acquired at times when the cycle for that particular industry may have been starting to improve.

Discretionary - To be distinguished from "advisory". An investment manager must have a largely discretionary relationship with his clients. At A.D.A.M., we are discretionary managers and take decisions, within general guidelines provided by the client, without specific reference to the client. By contrast, an "advisory" relationship, such as one that is maintained with a broker, necessitates that the advisor consult with the client on the occasion of every purchase or sale.

Dividends - While recent changes in tax law have brought dividends back into "vogue", there is a much older and stronger case to be made for dividends: nothing, absolutely nothing, validates a company's cash flows/profits as much as a dividend payment. As Doug Casey rather irreverently put it, "dividends are an outward sign of inward grace." While not all of our investments pay dividends (there are some very sound reasons to buy selected non-dividend payers), we know, as do many others of course, that dividends can comprise a significant portion of the return on investments over the years. This is particularly true for stocks whose dividends can increase over time; not for nothing is compounding called "the eighth wonder of the world."

Exploration - Those investors who follow the mining sector will often use the term "exploration company" to describe younger, more speculative firms which are prospecting, but not producing. This sector may be inappropriate for many investors, but, for those with a higher degree of risk tolerance, the returns can be truly extraordinary as these firms represent the most highly-leveraged "play" on the price of the metal being mined. I have followed the exploration sector for many years and my conclusion is that, ultimately, the single most important determinant of success is the credibility and quality of the management. As such, I make it my business to know the people involved in such firms and to become intimately familiar with their track records.

Global - For Capitalism to truly fulfill its promise, as the greatest possible generator of wealth, it must be allowed to operate on a world stage. I believe that attractive investments are to be found all over the globe and no reasonable investor should be limited by frontiers. Our approach to investing is truly global. We do not determine an artificial allocation to foreign investments, but rather always compare values around the world, applying discounts or premiums to various markets as appropriate. Thus, we can be very heavily weighted in non-U.S. assets at different times.

Inefficiency - Some observers feel that financial markets are "efficient" to the point that the prices of investments generally reflect their value at all times. This is plain nonsense. While it's probably true that gaining exceptional returns on a consistent basis through investing in a portfolio of large, well-researched stocks is going to be difficult--and increasingly so in an ever-more global world--there are plenty of "pockets of inefficiency" around the world. These pockets are where value is to be found.

Investment Management - Who would argue with the phrase, "it's a busy world"? Put another way, success in any area today depends upon being deadly serious and focused. This is especially true of investing. Professional investment management may provide an answer for certain investors. Our clients are often professionals or enjoying busy retirements. They do not want to commit themselves to long-term relationships with a computer screen.

Mutual Funds - By almost any measure mutual funds, as an industry, have been a huge success. They are "pools" of money from millions of investors and trillions of dollars are invested in them. Funds are not the answer to every investment situation, however. They are particularly unsuited to volatile sectors or markets, where the manager is often forced to invest at the top when inflows are typically the highest, and sell at the bottom when there are often outflows. I won't pretend that private investment management is any kind of panacea to the problems of investing in mutual funds, but the more personal, individualized quality of a "managed account" certainly overcomes many of the problems inherent in mutual funds and appears to suit most investors with significant funds at their disposal.

Returns - If there has been any clear benefit from the recent bear market in stocks, it seems to have been that many investors have moderated the demands that they place on their portfolios. Most investors are looking for reasonable, single-digit returns from broadly diversified portfolios of stocks and bonds. Naturally professionals and amateurs alike hope for much better, but the strategy of serious players can never be based on hope.

Risk - This is a nettlesome concept and there is often a "disconnect" between investors and their advisors concerning its meaning. There is a difference between risk and volatility, though the academics seem to measure risk by volatility, which is nonsense. Absolute risk involves the possibility of a stock price declining and staying down, even moving to zero. Volatility involves prices moving up and down, and that need be "risky" only if the investor has an urgent need for money or panics. Some of the best long-term investments are highly volatile. Or put another way, I'd rather a lumpy 20% than a steady 10%.What seems fairly clear is that most investors are typically willing to accept higher risk when markets are riding high, which of course is exactly when perils are greatest. It is at times such these when a money manager who clings ferociously to a value discipline can add the greatest value. Sadly though, it is during these periods when value managers are fired seemingly for not taking sufficient risk.

Senior - This term describes the largest producers in the mining sector. They are often diversified but do not necessarily have strong balance sheets or even particularly strong management. As a rule, they have less potential for juniors and exploration companies but are also a more certain play on the metals markets. In valuing these companies other issues often come into play such as the extent to which they have "hedged" their production. We make it our business to know and understand the implications of techniques like these.

Value - Too many investments are made on the basis of hope. That's often the rationale behind too many "growth" stocks. A value discipline requires being critical of appearances. It demands that you look for the "beef". One buys a stock at a price that represents a discount to what is, not what might be at some undetermined point in the future.

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