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How We Invest

 
 

Investment Principles

The purpose of financial markets is to provide for the efficient allocation of capital to businesses that create wealth and opportunity. Our goal is to align the interests of our clients with those outcomes. Therefore, all our investment decisions are guided by the following principles:

  • Invest for the purpose of achieving superior total return over the long run.
  • Emphasize companies with superior business franchises and enduring competitive advantages -- producing consistent and superior growth of profits and dividends along with high and sustainable returns on capital.
  • Invest in companies with proven managers who treat shareholders like partners.
  • Exercise patience, discipline, independent judgment and humility.

Minimizing Risk

Risk is commonly defined as the year-to-year volatility of returns. Low volatility is an important objective. However, we manage portfolios with a more fundamental definition of risk: the probability of losing one’s capital. To minimize risk we abide the following disciplines:

  • Invest in less than 25 companies that we study carefully and follow closely.
  • Hold a portfolio of companies which, as a group, produce higher profits and dividends year-after-year.
  • Create a margin of safety by purchasing common stocks at prices well below our estimate of the intrinsic value of the company.
  • Emphasize investments in lower risk business– companies that enjoy constant and recurring demand for their products and services.

By abiding these disciplines we have achieved less volatile results for our clients and, most important, we have significantly out-performed the equity market benchmarks during periods of broad and sharp declines.

 

Opportunity was what set American history off from the history of all other lands. The frontier had been Opportunity. The American school system was Opportunity. The enterprise system was Opportunity
— In Search of History, Theodore H. White

 

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Investment Approach

 

There are many different and successful investment strategies. Our way is not the only way. However, of one thing we are certain: changing one’s strategy to fit the prevailing market trends will, in most cases, lead to poor investment results. Our decision-making process is classic “bottom-up” stock selection. We abide an approach which emphasizes companies that have demonstrated consistent and superior profit growth and high returns on capital. We place particular emphasis on a select group of common stocks that we refer to as growth bonds” -- companies whose cash flows have provided a rising stream of income through steady increases in dividends over many years.

We do not engage in market-timing and we do not base our purchases and sales on short term assumptions for economic growth, monetary policy and corporate profits. Still, we monitor these critical variables closely in order to avoid excessive exposure to significant changes that might have long lasting adverse consequences for our clients. We rely on our own fundamental research to identify companies that are engaged in businesses with superior market economics. We prefer businesses that are understandable and relatively predictable. We invest exclusively in companies that exercise long-lasting competitive advantages. Given these standards, our clients’ portfolios are invested in less than 25 companies and the annual portfolio turnover is very low.

Many of the high quality companies of interest to us are rarely undiscovered. Still, opportunities arise because the majority of investors are short-sighted – chasing the fads, themes, news and rumors that drive stock prices in the short term. Yet, history confirms that differences between market prices and intrinsic value are always corrected eventually – sometimes quickly and sometimes over a few years. Indeed, patience and humility are critical to our approach.

In summary, we are investors – not traders – and we rely on outstanding businesses and managers to create wealth for our clients over the long term.


Do not believe that you alone can be right. The man who thinks that, the man who maintains that only he has the power to reason correctly, the gift to speak, the soul – A man like that, when you know him, turns out empty.
— Antigone, Sophocles