Stock Market
The stock market is reasonably efficient but emotional enough to provide opportunities for the disciplined investor
Studies show that the most important decisions affecting portfolio returns are asset allocation, equity style selection, and security selection. We strive to optimize asset allocation, equity style selection, and security selection based on the risk return expectations for each class and individual needs. The importance of compounding long term capital growth associated with equity investing while maintaining flexibility to shift asset allocation away from equities when risk return is unfavorable can not be emphasized enough.
Investment Style
Combination of value, growth, uptrend to improve performance and lower risk
Seek superior long-term performance by buying financially strong, well-managed companies at value prices. We are disciplined about only buying them when available at a discount valuation. Equities purchased at prices below their intrinsic value protect capital from significant permanent loss and also appreciate substantially once the market recognizes company’s economic value. For example, if a stock is bought for half its intrinsic value, if the value grows 10% per year through retained earnings, and if the share price rises to reflect its worth in fifth year, the investment would compound at 24% per year.
Implementation
Minimizing total costs is paramount to superior long term performance
Transaction costs are a vital link in the portfolio management process and long term returns. Total cost of implementing any investment strategy, are higher and more complicated than is generally perceived, even for no load mutual funds. Minimizing transaction costs is essential in order to exploit market opportunities. We seek to achieve this by using combination of index funds, ETFs and deep discount brokers.
Business Management
Independent, pure investing focus with no sell side or soft dollar conflicts
Our relationship form is adviser-client, but attitude is partnership in an atmosphere of candor, mutual respect and frequent communication. We aim to create goodwill that will help us endure unavoidable periods of subpar investment results.
Buy Discipline
Good business, good people, and good price
Buy fractional ownership in such publicly owned businesses as if you are buying entire company.
- Good businesses are understandable businesses with strong balance sheet and sustainable competitive advantages, generate ample free cash flow and have pricing power.
- Good people means managers that are capable operators, shareholder oriented, efficient capital allocators and with high integrity and candidness.
- Good price means buying at a discount to intrinsic value to give a margin of safety. The intrinsic value, though somewhat subjective, is derived from a) present value of future cash flows, b) sum-of-parts value, c) private market value, d) comparable business sales.
Sell Discipline
Reaching target price or impaired future earnings power
A portfolio holding is sold for any of these reasons:
- The price reaches the target price and no margin of safety remains.
- Risk return profile can be improved substantially, e.g. replacing a business selling at 90% of its worth with an equally attractive company at 60% of its worth.
- The future earnings power of the company becomes severely impaired or cloudy.
- Management actions are not building shareholder value.