Risk & Taxes

Risk is commonly defined by investment professionals as the year-to-year volatility of portfolio returns. However, we manage assets with a more basic definition of risk - the probability of losing one’s capital. Indeed, preservation of capital is our first priority.

Our investment approach, particularly our longer term focus, is the source of the confidence and patience necessary to buy, or hold, when others may be selling at depressed prices. As long as a company’s profits continue to increase, and its return on capital exceeds the cost of capital, then its value is compounding and eventually this value will be reflected in market prices.

Our bottom-up strategy also spreads the risk of owning equities across several distinct decisions. In contrast, a top-down approach often leads to fewer portfolio decisions and more concentrated exposure to the short term whims of the overall market.

By holding securities for long term appreciation we minimize the loss of capital due to transactions costs and taxes. Excessive portfolio turnover results in the premature realization of gains and less capital at work for the client.

Although tax consequences may not be a consideration in certain individual retirement or institutional accounts, within taxable portfolios the impact can be significant over time. Therefore, we advocate selling securities only when company fundamentals have permanently deteriorated or a substitute investment can be found whose return potential compensates for the loss of capital to taxes.