Investment Process

Depending on each client’s unique situation, guidelines, and objectives, we invest in stocks for long-term growth of capital, and fixed-income securities (bonds) for income and stability of capital.

STOCKS. We view stocks as ownership interests in sound businesses. Dozens of academic studies over the last 80 years, plus decades of our own experience, confirm that certain characteristics lead to exceptional long-term results in the stock market. We look for the following in every investment opportunity:

  • Deeply undervalued companies, selling at low prices in relation to earnings, assets, cash flow, dividends and/or estimated worth
  • Profitable companies that earn consistently high returns on sales, equity, and invested capital
  • Financially strong companies, with ample liquidity, high levels of free cash flow and low debt in relation to invested capital
  • Owner-managed companies, with significant ownership by officers and directors, who exhibit a high degree of honesty and integrity
  • Relatively small companies, with long histories of continuous operation

We choose stocks through a rigorous, highly disciplined research process. For each company of interest, we estimate what it’s truly worth using a business appraisal process. We thoroughly analyze a company’s financial statements to evaluate profitability, financial soundness and prospects for growth in sales, earnings, equity, cash flows and dividends.

The price you pay for any asset determines its margin of safety and future returns. Accordingly, we will buy a stock only if its current market price is less than 2/3 of what we estimate to be the worth of its underlying business, providing the company meets the tests of financial soundness, profitability, and growth prospects.

There is a close connection between margin of safety and diversification. Stock portfolios are highly concentrated in a small number of carefully chosen companies. A well diversified stock portfolio typically contains 12-20 stocks among 10-12 different industries.

BONDS. Fixed-income securities are bought in accordance with a passive, laddered maturity approach. Selection criteria include high liquidity (easily bought in the marketplace); high quality (according to the leading rating agencies); and relatively short maturities (10 years or less). Purchase candidates include U.S. Treasury and Agency issues, bonds issued by financially sound industrial or financial companies, and tax-exempt municipal securities.