Q & A with Bob Nichols, or How the Wealthy got that Way

by Dual Income No Kids on July 7, 2009 · 0 comments

Hi All,

Its another brilliant day here in the states. For today’s posting, we are pleased to bring you an interview with Robert Nichols, the Chief Executive Officer of Windward Capital, a Los Angeles based wealth management firm. We are featuring an interview with Robert for two reasons. First, his funds managed to come out of last years stock market bloodletting beating the averages – a rare feat. Second, Bob has worked with a lot of high net worth people and thus has a good sense of HOW one becomes wealthy. This is obviously an important question for those interested in financial security.

In his own words, here are Mr. Nichol’s thoughts on wealth building and successful investment strategies.

ABOUT ROBERT.

My education has focused on business and finance. I am a graduate of the Claremont Graduate University with an MA in Management, an MBA in Business and, a Ph.D. from the Peter Drucker School of Business.

In 1971, I formed an asset management firm, RNC Capital Management Co. (RNC) and served as its President until 1992. During that time, the firm grew its assets under management from $500,000 to well over $1.3 billion, including large institutional clients such as the Arkansas Police and Fire, American Institute of Architects, GTE and the Territory of Guam. By the time I sold the firm to Bank Austria in 1992, we also managed 8 public traded mutual funds.

I created my current firm, Windward Capital Management Co., for the express purpose of implementing an investment strategy that we had been studying at RNC for a number of years. In addition, I was anxious to provide investment services to high-net-worth clients in the Los Angeles area to escape the travel burden I had been experiencing at RNC.

Our clients are now, generally, the Trusts of wealthy individuals and their families.

BUILDING WEALTH?

Building wealth normally takes time and patience, and because time is such an important element in the wealth building process, a certain amount of discipline is also necessary. One of the important rules is to “pay yourself first.” Let me explain. Most people like to spend everything they make, and that is a huge and, obvious, impediment to building wealth. It’s so easy to buy that more expensive car or take that nice vacation trip, but it’s a habit the wealthy have learned to break. If you “pay yourself first” you will set aside at least 15% of your paycheck as soon as it is cashed. A good rule is to save about 10% in a retirement account (that will also give you some tax-savings) and put 5% in a cash account for a rainy day. Don’t kid yourself, life is going to deal you a number of very difficult financial moments; have some cash on hand and prepare yourself for those difficult times. In the wealth-building arena, nothing is more important than financial discipline.

OUR CLIENTS’ WEALTH-BUILDING EXPERIENCE?

Believe me when I tell you that 99% of our wealthy clients didn’t accumulate their wealth overnight. Most of them can tell stories of near-despair and more than one period of time in their lives when their financial outcome was uncertain. In almost every case, however, they have said that spending discipline brought them through the tough times. I have noticed, over the years, that the ability to build wealth is present in almost any occupation that becomes the PASSION of the worker. Passion soon transforms itself into PERSISTENCE and DETERMINATION that are key elements to wealth building. We have wealthy clients who are dairy cow brokers, plumbing supply owners, engineers and clients who participate passionately in a large number of other occupations. The key to their success is the love of their work. There is an old saying that says, “Love what you do and you will never work a day in your life.”

MARKET CONDITIONS?

There are many different factors to be used by an investor in allocating investment assets including age, debt, and other financial and family factors. It would be worthwhile to mention, however, that the single largest deterrent to making good investment decisions in all economic conditions has been investor EMOTION. The emotions of greed and fear are not equally distributed in the human mind, however. Fear trumps greed by a 2 to 1 ratio. Today, investors need to ask themselves, “Is the U.S. ever going to recover from this economic downturn?” If the answer is “ Yes” then investors should put their fears aside and begin to buy equities. Small investors can buy Exchange Traded Funds or mutual funds and gain the diversification they need to partially allay their fear of another stock market downturn. In my opinion, investors with long-term horizons (5-10 years) are being presented with a compelling investment opportunity.

Small portfolios of individual stocks should be built around a core group of large company equities. Stocks like Proctor & Gamble and Johnson & Johnson pay excellent dividends and, in my opinion, are good examples of such core long-term holdings. (Investors should seek the advice of their financial consultants before investing). The mistake most small investors make is in being too speculative. Remember, becoming wealthy is a long-term process, and there is nothing wrong with getting paid to wait by collecting dividends.

There is always a reason NOT to invest. Wealthy investors are contrarians, and they are always looking to swim against the tide of fear that keeps smaller less experienced investors on the sidelines.

(Bob and Teammember At Work)

THE WINDWARD STRATEGY?

The most important research we perform is research designed to identify two or more dominant economic themes. We buy equities for both our Growth and Value investment strategies that are participating in more than one such theme. In other words, we want the stocks we use to have more than one dependable source of revenue and, if possible, we would always prefer a company with a reliable, strong, free-cash flow. Our Growth portfolios are a little more volatile than our Value portfolios, but the two key issues with us are to contain the portfolio risk while continuing to produce exemplary investment returns.

As I said, we are very risk averse. Our growth strategy allows us to use value stocks to offset the inherent volatility of growth stocks, and our use of a limited number of growth stocks, in conjunction with a greater number of value stocks, is designed to enhance the performance of our Value portfolios.

LIFE CYCLE INVESTING?

Certainly, as an investor ages, or takes on more financial responsibility, he or she should consider the role that bonds might play in their portfolio. Bonds are not “bullet proof,” however, they do provide additional stability to a portfolio during a stock market downturn. Having said that, I would also say that it may prove to be very difficult to keep up with inflation with a fixed-income-only portfolio. There are a number of excellent balanced (some stocks and some bonds) mutual funds that can accomplish almost any tolerance for risk that an investor might have.

OUR WEBSITE?

Our website has a lot of information about our investment Philosophy, Portfolio Managers, Investment Process and Performance over our many years of investment management. If you do not find what you are looking for on our website, just give us a call and we will send you a complete brochure.

www.windwardcapital.com

Thanks for listening.

Robert W. Nichols, Ph.D.
CEO/Portfolio Manager
310-893-3000

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