What Sets Peridot Capital Apart?

Peridot Capital Management was founded based on the premise that the many investment advisory services mass marketed to individual investors left much to be desired (details are discussed below). Peridot Capital was formed to be a better alternative for those looking to build wealth over the long term and this site tries to convey the differences.

Mutual Funds

The majority of investment assets are held in mutual funds. While the positive arguments for mutual fund investing (professional management and diversification) are important, the pitfalls within the fund industry are abundant. They include lack of personalization, high expenses, and lack of performance. Every investor in a mutual fund owns the same portfolio. Fund managers have no idea who their investors are. They could be recent college grads, baby boomers in their peak earning years, or the retired. Each of these investors will have different risk tolerances and investment time horizons, but this will not be reflected in the investments they hold through the fund.

The average equity mutual fund charges investors 1.5% per year in expenses. This figure does not include any sales loads or transaction fees that may be incurred, which can add up quickly. Some funds have upfront loads of as much as 8.5%, so investors have dug themselves a deep hole even before their investment has had a chance to earn a return.

It is possible that paying high fees could pay off for investors, assuming the performance of these funds was superior, but that is the exception. Statistics continually show that over the long term, mutual funds trail the broad market averages, such as the S&P 500 index. It has also been shown that an investor who bought shares in the mutual fund company itself would have made more than an investor who invested in the company’s funds. That should be glaring proof that these companies are rarely putting clients’ interests ahead of their own.

It is true that every year there are hundreds of funds that outperform (out of the thousands that are operating), but those same funds have shown to be sub-par performers in the years after they showed superior returns. Very few funds are able to consistently outperform. Those that do either close to new investors because they attracted so much money, or they remain open but underperform due to the fact that they are so big.

Stock Brokers

Finding a stock broker who knows you personally and whom you trust can eliminate the problem that mutual funds investors face in lacking a personalized investment strategy. Brokers work with you individually and can customize a portfolio for your specific goals. Unfortunately, of the three mutual fund pitfalls highlighted previously (lack of personalization, high expenses, and poor performance), only the first is solved by going the broker route. Full service brokerage firms charge very high commissions for each trade and their investment recommendations come from the myriad of Wall Street research analysts who have shown little skill in picking winning stocks. Research shows that Wall Street analysts are no better at picking stocks than monkeys throwing darts at the stock tables in the Wall Street Journal, so why pay high commissions for their recommendations?

To illustrate this point, consider a model portfolio published by Edward Jones, a St. Louis based full service brokerage firm with 9,000 branch offices and over 6 million customers across the United States. Since they began publishing their model portfolio in 1993, their investment recommendations have trailed the S&P 500 by about 1% per year through 2005. And yet, their customers pay anywhere between 0.5% and 2.5% per trade in commissions, so actual performance is far worse than that. As with mutual funds, few retail brokers can provide what is most important for investors, above-average returns.

Index Funds

It’s no wonder, after what you have read so far, that investors have flocked to index funds and exchange traded funds in recent years. Many were burned by broker recommendations and mutual funds during the bear markets of 2000-2002 and 2008-2009. When trust is running thin and conflicts of interest abound, why not just buy the entire stock market?

On the surface, index funds appear to be quite an attractive alternative. Unfortunately, many investors are used to the stock market doing very well. After all, the greatest bull market ever ran from 1982 through 1999. During that remarkable stretch, the S&P 500 returned an average of 19 percent per year and rose in 17 out of 18 calendar years. Index funds indeed shined during that time, and they will do wonderfully during bull markets.

However, bull markets occur less frequently than investors might think. It is true that since the 1800’s stocks have averaged double digit annual returns. Since no investor invests for that long, it is helpful to look at the various cycles that have occurred over time. Below are several examples of what can happen without raging bull markets like the one we saw from 1982 to 1999. The “market” refers to the S&P 500 index except for years prior to its creation. For those years we will use the Dow Jones Industrial Average.  

• 1929-1954   The market peaked in 1929 and didn’t reach that level again for 25 years

• 1926-1976   The market returned an average of 3.5% per year for a 50 year period

• 1982-1999   The market averaged 19% annual returns with only 1 negative year

• 2000-2009   The market is down so far this decade

As you can see, index funds will produce awfully disappointing returns unless the stock market is booming. With the greatest bull market behind us, overall stock market returns in the short to intermediate term should likely fall far short of their historical average. Index funds work when most stocks are rising, but investors relying on such an environment will need to be very lucky and could very well be disappointed, even over long periods of time.

How Peridot Is Different

Peridot Capital was founded as a better alternative to mutual funds, index funds, and stock brokers. For mutual fund investors and those who use stock brokers, it is a tough task to earn above-average investment returns. The combination of high expenses/commissions and average (at best) investment recommendations make it nearly impossible to beat the S&P 500 index’s return consistently.

Peridot Capital’s clients avoid both of these traditional pitfalls. Our clients keep their accounts with discount online brokerage firms, paying around $7 per trade. By keeping transaction costs as low as possible, investors keep the majority of profits earned from their investments. Peridot leaves all of the back office work to brokerage firms so we can spend all of our time doing what we do best; independent, conflict-free research and portfolio management. Whether you are just out of college or entering retirement, we can create a customized portfolio strategy for you and implement it without any impediments to success.

Since our portfolio management fees are calculated as a percentage of your investment assets, we have incentive to make you money, not to simply buy and sell many times over to generate commissions. We trade to make our clients money and for no other reason. Rather than focusing on a “company” we focus on a “stock” instead. What growth expectations are built into the current stock price? What are the chances of such expectations being overly conservative or overly aggressive? The answers to these questions will ultimately determine the direction of a stock.

All in all, most investors earn below-average or average returns due to high expenses, poor investment selection, and little protection should the stock market not rise substantially over the course of one’s investment horizon. By keeping costs down, finding undervalued stocks, and having the flexibility to avoid investments that are overpriced and exposure to markets that have meaningful downside risk, Peridot Capital has been able to deliver market-beating returns for its clients and hopes to continue doing so for many years to come.