The Weatherstone Principles

Investment Philosophy: Protect investor capital and take risk when that risk has historically rewarded investors.

The four pillars of the Weatherstone investment philosophy are as follows:

  1. Measure Risk, Determine Your Expected Return

By having a reasonable idea of what type of return to expect for a given level of risk, it allows you to better plan for the future. Additionally, it helps in determining how to better allocate your portfolio based on your goals and objectives. This concept is the basis of Modern Portfolio Theory, which was developed by Nobel prizewinning economist, Harry Markowitz. Markowitz’s theory has been an important building block on which a significant amount of portfolio asset allocation is built.

Simply put, one could measure their risk versus reward by using the long-term average return of an investment, which could be 30-50 years. However, if the timeframe in which we look to capitalize on is less than 30 years, this approach may be wildly inaccurate. As the chart below shows, returns over a decade or more can vary dramatically from the averages, and we find that for many investors, a more accurate expectation is extremely beneficial when setting expectations and building an investment strategy.

Through the Weatherstone investment process, our team measures risk over both a short-term and long-term horizon to better influence our decision-making process. We believe that understanding what the potential long-term return for a specific asset class is, as well as the expected return based upon the current market conditions and factors that exist, we can help investors find a balance between both risk and reward.

  1. Be Risk Adverse

Numerous investment studies have shown that by owning assets that have higher levels of inherent risk, such as stocks, an investor may be better rewarded over time.  Many of these studies have shown that in order to achieve greater returns, an investor may be subjected to large declines and long periods of low returns due to the risk associated with the asset. While there is validity to these studies, we strive to make investing more rewarding through consistency, by analyzing historical data and factors that have helped in determining whether taking on greater risk is likely to be rewarded, both in the long-term and the short-term.


At times when our internal risk measurements indicate that the market is entering an environment in which risk has not historically been rewarded, we look to adjust the asset allocation of the investment portfolios to investments that have a higher expected rate of return. If we find that identifying growth-oriented investments with positive expected rates of return is challenging, we will redirect allocations to the safety and stability of cash and bonds. Of course, maintaining a heavy cash or bond position for a prolonged period of time may be a bit unusual and somewhat contrary to the norm, however, it helps to reduce risk during those periods that have not historically benefited investors, and also helps to minimize potential losses and allows us to quickly capitalize on potentially attractive opportunities.

  1. Adapt quickly

Market behavior is far from predictable, and adaptability is crucial as conditions change. We believe that the more frequently we can measure and monitor market risk, the better protected investors will be when negative conditions present themselves. This is done by measuring various areas of potential risk, and also, updating those measures on a weekly basis, which helps to mute some of the daily news that traders base their decisions off of, and yet, is still frequent enough to identify potential breakdowns.

This approach to risk management allows our team to identify inflection points early on, which could negatively impact our investor’s portfolios. Market trends such as these can be confusing at times, and may lead some investors to question whether their portfolio is appropriately positioned. But, times like these call for adaptability, and our team’s ability to protect investor’s capital is what sets Weatherstone apart from other money management firms.

  1. Flexibility Equals Long-Term success

“The market can remain irrational longer than you can remain solvent”

– John Maynard Keynes – British Economist

Behavioral finance would point to the fact that investors invest emotionally, not logically. In order to make logical decisions that will benefit our clients, the emotional element must be minimized in the equation. We believe that by building quantitative risk models designed to mathematically model the investment realities we are faced with, the emotional element of investing can be minimized. This approach has been shown to increase effectiveness and reduce errors in not just finance, but many other fields of study.

There are always pros and cons to consider when analyzing investment decisions, and we have found that by focusing on those logical factors that have historically been useful, and by looking at the mathematical probabilities of success versus failure in a logical manner, potentially negative outcomes may be reduced. Whereas, basing our decisions on predispositions or emotions on the market could result in a sub-optimal outcomes.

A Time-Tested Approach

The Weatherstone team has a lengthy history of navigating some of the most complex market environments of our generation, and oftentimes, we have taken a very contrarian view to that of money managers on Wall Street. As the legendary investor Warren Buffet famously observed, one of the keys to successful investing is to, “Be greedy when others are fearful, and fearful when others are greedy”.

At Weatherstone, protection of capital is our number one priority, with a secondary focus on growing investors’ wealth over time. We believe that success is more a matter of being prepared than always looking for the next big thing. Our team’s ability to help minimize losses in declining markets, but also capturing opportunity in rising market environments, may not only help to improve returns over time, but it will give investors the confidence they want, and the security they need.

  How We Make Decisions