We believe that ownership of well managed, financially strong businesses is the optimal way to accumulate wealth. Any business may experience a setback, but strong companies are usually the first to bounce back from difficulty. Over time, the advantages which a strong company applies to its business usually enable it to prevail over the competition and to provide exceptional returns for its owners.
We believe in relying on fundamental research. The great investors throughout history have all relied on independent fundamental research to guide their decisions. Riding a popular trend may work for awhile but it rarely produces good long term results. This is why we spend considerable time and effort gathering and analyzing information about the businesses in which we invest.
We believe that valuation is a key element in every investment decision. Investors who pay too high a price, even for a great company, rarely experience exceptional returns. Rigorous valuation analysis adds an important rational element to decisions, which are too often beset with conflicting opinions and emotional pressures.
We believe in minimizing trading costs. Frequent trading is expensive. Over time, excessive trading costs always hurts investment performance.
Our equity portfolios consist of 25-30 stocks from a wide range of industries. In our experience, for the types of companies in which we invest, this provides adequate protection from the effects of problems experienced by an individual company or industry.
Consistent with our economic assumptions we look to purchase stocks which are:
- In growing businesses with significant barriers to entry
- The dominant players in their business
- Aggressively competing to stay on top
- Financially strong enough to support their growth
- Selling at attractive prices relative to their prospects
- We do not base our selections on company size and we do not subscribe to either a growth or value style. Despite this, stocks selected using the above criteria tend to be those of larger companies with better than average growth rates selling at valuations which are somewhat below their long term averages. Over an economic cycle, stocks meeting these criteria are likely to come from all sectors of the market.
In addition to considering the rankings of various proprietary valuation models, we utilize our own historically based price earnings model and cash flow based valuation software to determine the attractiveness of each stock. Using a cash flow based system allows us to calculate the growth rate which is implicit in the current market price of the stock. Comparing this growth rate with past history, future estimates and common sense helps us spot valuation discrepancies and extremes. All of our stock holdings receive a complete review of valuation assumptions and parameters four times each year.
Although we prefer to hold worthwhile stock investments for long periods of time, most eventually reach a point when they should be sold. Stocks are sold from our portfolios when:
- The price reflects unrealistic expectations
- The fundamentals deteriorate
- The business model is no longer appropriate
- Management fails to execute effectively
- Management fails to act in the best interests of the owners of the business, i.e. our clients