Our Investment Philosophy
Understanding our investment philosophy begins by understanding what we are not.
We are not market timers. We don't believe anyone can consistently "beat the market" over the long run by jumping in and out of stocks based on their perception of whether the stock market is over- or under-valued.
We are not traders. We are content to buy and hold securities that we believe provide the best potential for long-term, risk-adjusted returns, making adjustments as necessary to achieve our clients' financial objectives.
We are not interested in return at any cost. We manage risk to achieve a risk-return ratio consistent with each investor's risk tolerance.
We are not pre-occupied with the short term. Short-term investment strategies rarely if ever produce the kind of results that build and preserve wealth. Our focus is on long-term, time-tested investment strategies individually designed to each investor's circumstances.
We believe that the foundation of an effective investment plan is a properly designed asset allocation strategy based on each client's investment goals and risk profile.
We follow a disciplined, highly focused investment approach that involves allocation of investments among diversified asset categories. Independent research has shown that how investments are divided among different asset classes is responsible for more than 90% of the variation of returns in an investor’s portfolio.
Although investment risk is inherent in every portfolio, we attempt to reduce a client’s overall exposure to risk, while maximizing after-tax portfolio returns over the long term. To accomplish this objective, we seek to 1) diversify assets among various investment categories, styles and managers, 2) carefully select among investments satisfying specific criteria, 3) monitor performance, and 4) periodically adjust the portfolio mix based on changing circumstances.
The asset allocation process is based on each client’s individual financial condition, time horizon, investment objectives and risk profile. Accordingly, before any investment plan is developed, we collect personal financial information unique to each client. We then utilize a variety of analytical tools to carefully develop an investment policy statement with an asset allocation plan tailored specifically to the client’s investment objectives and risk tolerance.
Following the development of an investment policy statement and asset allocation strategy, we utilize a rigorous screening process to select from over 14,000 mutual funds to determine the funds that meet our investment criteria. The fund selection process emphasizes long-term consistency of performance, risk-adjusted return, continuity of management and efficiency of expenses. Funds are then continually monitored to ensure that investment styles and performance continue to satisfy our investment standards.
Individual Equity Management
In addition to asset allocation, we manage portfolios of individual equities using a disciplined, long-term value-focused strategy. Our objective is to optimize risk adjusted returns.
Our Fundamental View
We view a stock as an ownership interest in a business and believe each business has an intrinsic value equal to the present value of its future free cash flows. This is the price at which an informed, rational buyer would be willing to pay for the entire company in a private market transaction. We are bottom-up stock-pickers that use an absolute value philosophy in conjunction with relative value metrics, looking for companies trading at large discounts to intrinsic value.
We focus our research efforts on companies we can understand that have solid balance sheets, a history of free cash flow generation and with insider interests aligned with those of minority shareholders. We purchase those trading at discounts to intrinsic value based on our assessment of the company’s normalized earnings power. We seek to purchase such companies when their stocks appear to have low expectations embedded in the market price and attempt to do so at a margin of safety to our assessment of intrinsic value, realizing the uncertainty of future projections.
In general, we are market cap agnostic. That is, we buy stocks we believe are undervalued regardless of whether they fall within a large, medium, or small capitalization.
As long-term investors, short-term market price fluctuations do not concern us. We are concerned with permanent loss of capital, not volatility or short-term performance relative to a benchmark. Volatility may benefit our strategy as it often presents opportunities due to short-term price swings. Since portfolios are structured very differently from a market index (and contain far fewer securities), performance can be expected to differ markedly from a market index at times.
Our Investment Process
When evaluating companies (and their stocks), we look out over a 3-5 year time horizon. We screen companies based on fundamental factors, such as returns on capital, cash flow, earnings, and book value, as well as on relative price measures. Many of the ideas we generate are found among stocks whose recent market price performances have been well below-average. Among these, we seek companies whose stocks are down for temporary – and fixable – reasons. We review prospective investments individually and then together discuss the pros and cons of each investment idea. From these discussions, we determine whether a given security should be purchased, rejected or that more research is warranted. We attempt to choose the most undervalued companies for inclusion in the portfolio after evaluating them for suitability. We try to purchase at market prices representing a discount of at least 20 to 40% from intrinsic value. Once purchased, we monitor each going forward.
Our Sell Discipline
We monitor portfolio companies for significant changes and are concerned when the fundamentals underlying our investment thesis change. If a business deteriorates meaningfully, causing a revision in our estimate of intrinsic value and invalidating our original investment thesis, we may liquidate the position. Also, when prices reach or exceed our estimate of intrinsic value (even if prior to our targeted time horizon), we may sell a portion, or all, of the position.
We may hold large cash balances at times, which will reflect our lack of ideas available at adequate discounts rather than an attempt at market timing.
With short-term market fluctuations largely due to random factors, we believe a reasonable evaluation period for our investment approach is 3-5 years.
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