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Investment Management
Blue Water Capital Management uses the combined principles of advanced academic research and Nobel Prize winning concepts to build and manage low-cost, extremely diversified portfolios. These portfolios are expected to have better long-term performance and/or risk (as measured by standard deviation) than a blended benchmark similarly constructed of the S&P 500 and the Lehman Brothers Aggregate Bond indices.

Example: In a comparison between our Blue Water 60 portfolio (comprised of 60% equities and 40% fixed income) and a benchmark of 60% S&P 500 and 40% Lehman Brothers Aggregate Bond, we expect that over time either:

  • The Blue Water 60 will have better performance with similar or less risk
  • The Blue Water 60 will have similar performance with less risk
Markets Are Efficient: This is a core belief and philosophy at Blue Water Capital Management. This means that we believe that market prices are fair, and they fully reflect all available information. We are not saying that markets are perfectly priced, but they represent the collective wisdom of all the participants.

Example: If Microsoft is trading at $30/share, we believe that is its fair value. If you placed a market order to sell 100 shares of Microsoft, would you expect to receive $35/share? No, you would expect $30/share because that is what the rest of the market participants are telling you its worth.

Example: Let’s say you go to E-Bay to see if you can find a bargain deal on a “valuable” that’s worth about $1,000. You find it has a current bid of $250, so you start there. Debbi, also knowledgeable about the “valuable”, soon finds it online and enters a bid of $400. You counter with $500, and she with $600. Chances are you will both go back and forth until the bid is close to $1,000. The bargain you thought you found has vanished. The collective knowledge of only two people led to a pretty efficient (fairly-priced) market.

A market only needs a few participants to approach efficiency. Think about the investment market and how many participants (money managers, analysts, individual investors, etc.) are involved. You may get away with a “steal” at E-Bay because of poor market knowledge and/or little market participation. But how often do you think you could get away with a “steal” on Wall Street? How is it that the millions of other participants mis-valued your stock? Chances are they didn’t mis-value it, you did.

The efficient markets approach does not question whether a person’s individual stock picks will go up in value, it questions whether that person can consistently outperform the market as a whole? Assets are re-priced every minute of the day according to the news that comes out. As new information enters the market, it is quickly absorbed into the prices of securities, and thus hard to capitalize on. In fact, markets are only getting more efficient. Advancements in technology, like the internet and cell phones, only ensure that people are better connected and more knowledgeable (or at least have access to more knowledge...).

The efficient markets belief is at odds with traditional investment strategies, including most transaction-based Wall Street strategies. It has, however, been supported by numerous academic studies, both theoretical and empirical. These studies show, among other things, that the risk-adjusted returns achieved by professional investment managers are no better than those of the market as a whole. This was primarily due to the expenses and taxes incurred with active management. At Blue Water, we don’t try to beat the market, we try to be the market, which over time has delivered very good rates of return.

Classic economics joke: An economist and a non-economist are walking down the street. The non-economist spots a $20 bill on the sidewalk and starts to reach for it. “Don’t bother,” says the economist. “If it were real, somebody would have picked it up already.”

It’s not to say you can’t ever find a $20 bill, but can you make a living walking around picking up money others have dropped? With that in mind, continue on to learn about the only three things you can control in investing.

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