American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

March 2014 – The Research Behind Our Services

Since its founding, our parent organization, the American Institute for Economic Research (AIER), has been dedicated to conducting independent, scientific, economic research to educate individuals, thereby advancing their personal interests and those of the Nation. American Investment Services, Inc. (AIS) was created in order to extend this mission specifically within the field of personal finance and investing.

AIER’s founder, E.C. Harwood, believed that a well-functioning society requires a citizenry that is largely self-reliant. But he also recognized that knowledge acquired through rational procedures of inquiry was essential to that outcome. AIER’s economists and AIS staff produce research intended to be useful to ordinary citizens and free of the many biases that dominate the financial services industry. We know of no other money management firm with greater freedom to pursue research that is both independent and designed specifically to meet the immediate, “real-world” needs of its readers and clients.

The Ivory Tower vs Snake Oil

In our view, most investment research fails to address the needs of ordinary investors. At one extreme is the scholarly research conducted by economists at colleges and universities. To be sure, faculty at several prestigious institutions can take credit for many of the great advances in financial economics. Indeed, our broadly diversified asset-class approach to investing is predicated on the work of Markowitz, Miller, Sharpe, Fama and several other “giants” in the field of finance.

But extracting useful research from the torrent of articles published is a daunting task. Incentives in academia are aimed toward “being published” and as a result scholarly journals are filled with articles written for an academic audience rather than for individual investors. Even in the information age most investors would be hard-pressed to gain access to these publications or search for relevant articles and, in many cases, would find them indecipherable.

At the other end of the spectrum is research produced by commercial entities, broker-dealers, fund companies and other money management firms. These entities are in theory well-positioned to create investment vehicles designed to fulfill the long-term investing needs of ordinary investors. Some, such as Vanguard, Dimensional Fund Advisors and certain exchange traded funds (ETFs), are extremely effective at doing so.

All too often however commercial entities simply produce marketing materials disguised as independent research. Published findings are frequently biased by pressure to develop products that can be easily sold in order to generate short-term earnings. Genuine asset-class analysis, for example, is often subverted when mutual fund companies with large marketing budgets churn out funds in response to the investing craze of the day. Such practices cater to performance chasing, which leads many investors to buy at the peak of investment trends.

Firms eager to push products will often identify a trend that appears in recent data and cite it as “proof” of a valid investment approach when in fact they have only come upon a series of returns that resulted by chance. Such data mining instances are a violation of sound statistical procedure. See page 21 “Beware the Index Label”.

We have written extensively about broker-dealer representatives who have no fiduciary responsibility to their clients but can earn commissions for selling high-fee, proprietary products based on such questionable research (see accompanying box).

A Better Path

Our research methodology, by contrast, takes a “bottom up” approach by first identifying the needs of our clients and readers. Our research staff then seeks the best way to meet those needs. We believe this paradigm stands out in an industry dominated by firms that create products first and then push investors to buy them. Our asset class recommendations rely on decades of peer-reviewed portfolio theory that thousands of investors have applied successfully. We review scholarly research to distinguish between findings that are of use to individual investors and work that is of little practical value. Once theoretical portfolios are formed from these asset classes we select those investment vehicles (mutual funds, ETFs or direct
investments) that are best suited, after accounting for fees, to capturing the risk-return profile associated with that research.

AIER’s empirical methodology and its longstanding focus on monetary policy and price inflation lie at the heart of this process. Our recommendations are validated statistically to ensure our readers with the highest probability of meeting their financial goals in real (inflation-adjusted) dollars. The accompanying article “Reviewing the 4 Percent Rule” is an example of collaborative research intended to address the needs of investors approaching retirement.

We are charged with extending AIER’s educational mission. In so doing, we extract the best research available from all sources. We are confident this provides the best advice available for our readers, our clients, and ultimately ensures our own success.

Also in This Issue:

Two Sides to Every Trade
The 4 Percent Withdrawal Rule: An Update
ETFs: Beware the Index Label
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles