Our investment approach is based on capital preservation. We achieve capital preservation in four ways:
1. Security Selection:
We select companies with long histories of strong revenue growth and cash profitability to preserve value. We identify companies with long-term positive fundamentals trading at a discount to fair value based on our proprietary discounted cash flow valuation models.
We believe in dividends. Dividends preserve capital, because companies with sustainable growing dividends provide an expected floor to a declining security price.
Portfolio risk is reduced by diversification. We limit the maximum exposure to any one industry to reduce the risk of capital loss. A portfolio of uncorrelated stocks provides balance. We don’t put all of our eggs in one basket, no matter how confident we are.
4. Position Size Limits:
As a corollary to industry diversification we limit our exposure to individual companies, no matter our level of confidence. This discipline mutes the effect of the inevitable mistakes that occur in our security selection.
- We have a bottom-up approach based on fundamental analysis. It is a fact based approach that emphasizes observed data versus subjective observations.
- Our security selection focuses on companies with predictable growth, solid free cash flow generation, that we can buy at a discount to fair value.
- We invest in companies over the long run. Evidence shows that short-term stock performance can be random. One has to be patient and wait for positive fundamentals to be reflected in security prices.
- We perform all research in-house using SEC filings, company reports, and meetings with 300-400 management teams per year.
- Our portfolio excludes “event driven” or volatile industries/companies that are inherently unpredictable and don’t lend themselves to fundamental analysis.
- When we buy bonds, we think of ourselves as lenders and conduct our analysis accordingly. Generally, bonds are held until maturity.