The following paragraphs outline some of the rules we follow in our investment process to safeguard our clients’ financial assets and consistently earn worthwhile returns. We hope you find them helpful in your own planning.
Maxims for Portfolio Management
Control of risk in our portfolios is paramount. Ongoing in depth research, daily monitoring, and firm stop-loss techniques are all part of our process. Every month we analyze why each client portfolio outperformed or underperformed the market benchmark and take appropriate action if necessary.
Cash is a valid asset class. Sometimes return OF capital is more important than return ON capital. Equities are appropriate for achieving capital appreciation; their dividend income is secondary. Bonds are the preferred vehicles to produce income to support current expenditures.
Market based indicators, such as interest rates, commodity prices, and currency values, give much better clues regarding the state of the economy and the outlook for financial assets than the forecasts of experts. Surplus financial market liquidity (as we measure it) is more important to overall bond and stock valuations than near term economic trends. Stock price charts will tell you if you are early or late to recognize an investment opportunity. You don’t have to be first; JUST DON’T BE LAST.
Don’t overdiversify. Concentrate your equity investments in the most dynamic, potentially long-lived, investment themes. Invest in more than one “play” in each theme. Ignore those industries that are not enjoying strong unit growth or which suffer from chronic price competition.
Trends of Market Share, Unit Growth, Selling Prices, Profit Margins, Return on Assets and Free Cash Flow together with management’s track record at achieving high levels of these metrics are the most critical measures of corporate success.
Growth companies are not always growth stocks. Stock prices are driven mainly by changes in the rate of each company’s profit growth. We sell our winners when their profit margins stop expanding, indicating that operating leverage is played out, or when their share prices go parabolic, indicating over exuberance among investors.
Among equities there are always some sectors or companies whose shares are inefficiently priced, that is: they do not yet reflect probable changes, for better or worse, in the outlook for the company’s profitability. Patience and a willingness to buck conventional wisdom is required when investing in inefficiently priced stocks.
Never try to “catch a falling knife.” There is no such thing as a one quarter earnings problem. Corporate problems take time to fix. There will always be ample time to do thorough research and develop high conviction that a sustainable corporate turnaround is underway. Beware of “value traps,” i.e. companies that appear statistically very cheap but for a good reason.
The three hardest things for most investors to do are : (1) sell their losers before they become disasters, (2) sell winners, when their fundamental appeal and valuation call for action, and (3) repurchase good stocks on pullbacks.
Thanks again for your interest. We look forward to hearing from you.
