Morningstar Advisor - Fall 2008 - (Page 18)

Advisor Profile Jeff Cavender and Lyle Watts, Principals, Cavender & Watts Wealth Management Group cash flow, sensible business models, transparent accounting, and companies that don’t use a lot of leverage.” Whether it’s in the balance sheets of companies or investors, debt is a red flag. Watts and Cavender believe that it magnifies weaknesses in difficult periods and leads to irrational decisions. “You have to be prepared for 100-year floods every 10 years.” Watts says. “You want to be able to sell when you ‘want to,’ not when you ‘have to.’ ” In addition, the partners require their managers to have equity ownership in their own firm, invest the majority of their net worth in their portfolios, and have at least 10 years of experience managing money. How they caught our eye: Share our awe of Warren Buffett. Career path: Cavender: Graduated from the University of North Alabama in 1989. Had wanted to be a basketball coach before switching major to finance. Worked at a wirehouse until 1996, when he started his own firm. Watts: Graduated from the University of Alabama in 1983 with a degree in investments. Worked at a few banks and a wirehouse before forming firm with Cavender in 1996. Personal: Cavender, 41, married, two children, ages 13 and 11. Watts, 46, married, two children, ages 17 and 14. Managers They Most Enjoy Talking With: Chuck Akre, Bob Auer, Bruce Berkowitz, Dan Fuss, John Keeley, and David Winters. “nine figures,” Watts says. Their clients are Huntsville’s small-business owners and doctors in the prime of their working lives and longtime corporate workers heading into retirement. A typical new client meets both advisors together to discuss goals and risk tolerance. Watts and Cavender then separately create a portfolio for the client. Although it’s largely a subjective process, Cavender says that he and Watts usually pick the same managers for the client and that their allocations are always within 3% to 5% of each other. The advisors resolve any discrepancies and then analyze how the portfolio would have performed during two bear markets and one bull market. They also demonstrate the effect that withdrawals during down markets can have. “We really want to magnify to clients what will be the effect on their portfolio if they make ill-timed withdrawals in a declining market,” Watts says. “Clients should know how that looks.” Pleased to Meet You Finally, they won’t invest with people they don’t like. They want to meet managers face to face at least once a year and talk with them at least once a quarter. “It gives us a chance to view the culture of the firm and to see what they’re all about,” Cavender says. “If they say they’re not willing to meet with us, even for just a few minutes, we’ll sell their fund. It’s happened before.” They also go to investing conferences, including Morningstar’s, to meet managers. The year’s highlight is the Berkshire Hathaway meeting. “It’s our holy grail,” Cavender says. Rocky Times Watts and Cavender aren’t big on pinpoint allocations and diversification. They don’t pay attention to style-box breakdowns. Instead, they leave the investing to a handful of mutual fund managers who have the proven ability of unearthing great values—managers such as the Keeleys in Chicago, the Auers in Indianapolis, Berkowitz in Miami, and Fuss in Boston. “We want our managers to purchase our businesses at a fair discount to intrinsic value,” Watts says. “We want companies that compound their business value at a far greater rate than their share prices. We want good free Watts says that the partners’ goal is to avoid a permanent loss of capital--which he defines as capital that cannot be returned to the client within a reasonable time period. That goal, it seems, will be tested by the current market. But where others see pessimism, they see opportunities in the market’s volatility. “It’s amazing to see how many companies see their share prices fluctuate annually 50% from peak to trough,” Watts says. “But markets aren’t perfectly efficient. Intrinsic values of companies don’t swing that quickly. They’re not like yo-yos. If you can understand this and use the market to your advantage, that’s when you can make a lot of money.” K 18 Morningstar Advisor Fall 2008

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Morningstar Advisor - Fall 2008 Contents New on MorningstarAdvisor.com Letter from the Editor Contributors Inbox Are You Preparing for Higher Taxes? State of Financials Oracles of Alabama Investment Briefs Managers’ Investment Secrets Revealed Conformity Becomes a Growing Concern at American Gimme Shelter Location, Location, Location Rooted in Buffett, Going for Growth Keeping Little Company Away from the Numbers Consumer Confidence What about Natural Gas? TIPS to Beat Back Inflation Investing in Hidden Assets Funds That Have an Edge Come Tax Time Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar One for You, 19 for Me

Morningstar Advisor - Fall 2008

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