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Patton Wealth Management, Inc.

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Foundation of Research

Research is the foundation of investment success

All great long-term investment strategies are built on the foundation of great research. The research that resulted in our Super-Diversification investment strategy took decades to do and was done entirely by our founder Mark Patton.

It’s unlikely you’ve ever met a research geek as passionate about his work and the impact it can have on you as Mark! Not only is he an investment geek but he is also a computer programmer. The combination of these two skillsets allows Mark to do research that tends to be far more efficient and comprehensive than many others.

There are many ingredients required to conduct valid and useful research when developing an investment strategy. Some of those key ingredients are the following:

1) Lengthy time period

a lengthy time period must be tested so that the research covers a variety of market conditions. Research that only considers a short period of time has a high risk of failure during longer periods of time. Mark gathered data, much of it dating back to 1962, from a wide variety of sources. He then incorporated all of this data into a proprietary computer database that serves as the foundation of much of his research.

2) Consistent strategy implementation

the same strategy must be implemented over the entire testing period. Problems occur when a strategy has to be “tweaked” to work during one period and “tweaked” a little differently to work in another for example. The investment strategies Mark has developed maintain consistent disciplines during the multiple decades of time covered in the research demonstrating their potential for long-term success through many different market environments.

3) Logical investment disciplines

an investment discipline must be based inherently on good logic to have a reasonable probability of being successful long-term. For example, a strategy based on which team won the Super Bowl may have worked historically but is not based on any logic that would suggest it will work in the future. Mark’s investment strategies are all built around proven mathematical principles and basic well-documented human behavior.

4) No strategy works best all the time

great long-term investment strategies will always go through shorter periods of time when they don’t work best. This is a simple reality of investing. Research can help us understand when to expect a strategy to work better or not. Mark’s strategies certainly do not produce the best returns during all shorter periods of time. His strategies have been designed to position investors for great long-term performance knowing and having the confidence to weather through some periods that will be disappointing.

Knowing where to focus research efforts that may have the greatest potential to add long-term value for clients as well as utilizing sound research principles typically requires decades of experience such as Mark has.

Mark's Research History

The history of Mark’s research extends back to junior high and high school. None of his family members had ever owned a stock but he had friends who’s did. He became fascinated with the fact that any investor could own a piece of these many companies. That fascination naturally led to a fascination with the prices of stocks going up and down and the reality that owning the right one at the right time could yield big profits. This is where the decades of research began.

From the very beginning Mark began purchasing all kinds of books and magazines about investing. These books spanned a wide range of topics but focused primarily on the analysis of stocks, how the economy works, and stories of some of the most successful investors. This collection of books today numbers in the 100’s and have been among the biggest influences in Mark’s research and investment disciplines and strategies used today.

Mark attended Indiana University and pursued a major in finance. The study of finance included a couple of classes on investments but this really was a relatively small contributor to Mark’s knowledge in this area. What was extremely valuable was the relationships Mark formed with a couple of his professors who would later validate his research and write a paper on the disciplines used in his investment strategy.

Mark worked for a large real estate company during part of his college years. While there he took on a project to write a computer program to manage the firm’s property taxes in 41 states. Mark designed the program and engaged a high school buddy who was an expert computer programmer. To complete this project, Mark had to learn computer programming. Little did he know that would be a lifelong skill that would dramatically impact his research and business.

After college and a couple of years at a large bank where Mark continued to improve and use both his research and computer programming skills, Mark founded what is today Patton Wealth Advisors. That was in 1992.

The first project Mark took on when starting his company was to build a comprehensive research system. For those who remember, in those days everything was in MS-DOS! Mark developed and wrote a program that integrated several of the most comprehensive stock research databases at the time. The system would then produce 30+ page reports on nearly any stock at the push of a button. Mark sold these reports, as well as a monthly newsletter, to individual investors and regional brokerage firms.

In addition to selling research reports and a newsletter, Mark was doing extensive research on his own. With Warren Buffett being Mark’s biggest hero in the industry, his research focused on identifying stocks that fit some of the same value disciplines as Warren Buffett. Then in 1993 Mark sold several of his stock research reports and newsletter to an individual who would later become his first investment management client. That was the start of what the business is today.

For the first several years of managing money for clients, Mark’s research focused almost entirely on the selection of value stocks (disciplines of Warren Buffett) for his clients’ portfolios. As logically and fundamentally based as this strategy is, it became apparent after a few years that getting a meaningful edge with such a strategy was extremely difficult if maybe not impossible.

An area of study in the investment community called behavioral finance got started in a meaningful way in the 1960’s. This is the study of the effects of psychology on the investment decision making process. It was in the mid-‘90s that it started to get some real attention and traction. This captured Mark’s interest and he began digging deep into the research.

After a few years of studying the literature on behavioral finance, Mark decided to create an investment strategy incorporating many behavioral principles. These seemed perfectly suited to Mark. A behavioral based investment strategy is one that ideally is designed to take advantage of the poor behavior of other investors. It was Mark’s opinion that to successfully do this, his behavior must be removed from the process. This meant that the strategy would be a set of mathematical rules that would be used to implement the behavioral disciplines. This was perfectly suited for Mark…building a rules-based (computer program) investment strategy!

The development of Mark’s first behavioral based rules strategy took about 3 years of intense research. It was a traditional long-only strategy launched in April 2001. Then following the bear market of 2000-2002, he returned to his research to create a short selling strategy to combine with the existing long strategy. This was completed and launched in mid-2003. This was Patton’s first stock hedging strategy which positioned the company to help investors in ways Mark did not even realize at the time!

Shortly after developing the long/short stock strategy, Mark engaged with a couple of institutional investors, both of whom had decades of experience and took great interest in his strategy. It was during his relationship with these investors that he learned the principles and math of diversification. Correlation is one of the key statistical tools used when building a diversified portfolio and Mark’s long/short strategy was a super fit.

This new understanding about diversified portfolios and the value his long/short strategy provides in a portfolio led Mark to another research project. The search was now on for investors who have utilized these diversification portfolio principles, how they have done it, and what have been the results. This was a lengthy research project that ultimately made it apparent that few investors are reaping the benefits of real diversification. The few that could be identified were university endowments with Yale and Harvard being the pioneers using these disciplines for decades with great success.

Mark studied these university endowments focusing mostly on the Yale Endowment due to its long-term implementation of the diversification principles, its great performance records, and its Chief Investment Officer having written books about their strategy. Taking all that was learned from his relationship with the two institutional investors and study of the university endowments, Mark created his Super-Diversification investment strategy. Super-Diversification incorporates all that was learned into a strategy that can be used by individual investors so that they can be positioned to reap the long-term benefits available.