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 over 60 combined
years 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 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.
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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.
INVESTMENT RISKS. Investors should remember that prices
of stocks are volatile, and often differ from the true worth of
the underlying company. Gains or losses in portfolio value will
vary from one period to the next. The market value of any individual
securities or a portfolio at a particular point in time could
be more or less than the amount originally invested. Permanent
capital losses might occur if securities are sold below original
cost. Past performance is not necessarily indicative of future
results.
