The core beliefs that form the foundation of our investment philosophy with regard to stock selection come from the principles of value investing, originally taught by Benjamin Graham and mastered by Warren Buffett. At its core, this simply means buying good businesses with attractive economics at a price that is at a significant discount to its intrinsic value (fair value). The attributes of value investing have successfully withstood the test of time and we have strong convictions that the consistent application of this investment strategy will serve to protect and grow our client’s assets over time. Although we do not invest 100% of our client’s assets into individual stocks, we do believe that a small amount allocated to individual stocks will help supplement the overall portfolio return achieved from our core mutual fund selections.
Below, we highlight in more detail our core beliefs and principles that guide our investment philosophy.
• We approach investing in a businesslike, appraiser-minded fashion. Examining the economic fundamentals of a business and determining its intrinsic value is at the core of what we do.
• We believe that the most important rule in investing is to invest with a margin of safety. Appraising business value can sometimes be imprecise due to changing long-term economic or company specific fundamentals, which is why investing with a margin of safety is so important. Specifically, margin of safety is the difference between market value and intrinsic value and the application is to purchase a stock only when its market value is selling at a significant discount to its intrinsic value.
• We believe that market participants are susceptible to human nature, which allows emotions to sometimes take precedent over reason and contributes to inefficiency in the market over the short-term. As value investors, we believe that short-term market inefficiency produces long-term opportunity. Over the longer term, we do believe that market participants act rationally and price businesses close to their intrinsic values. With every investment purchase we make, we intend to hold onto it for a multi-year period, which will allow time and reason to work in our favor as the long-term business fundamentals are revealed.
• We try to distinguish between what is statistically cheap from what possesses value and tend to invest in businesses with attractive economics that will reward the investor over time. We would rather invest in a great business at a fair price than invest in a fair business at a great price. Our investment selections will typically possess one or more of the following characteristics:
1. Strong balance sheet with little leverage. We are wary of leveraged business models and balance sheets and their power to drastically affect a business’ intrinsic value, both positively and negatively.
2. High returns on invested capital. Franchise value is only created when the return on capital invested in the business exceeds the business’ cost of capital employed.
3. Durable competitive advantages. The natural laws of capitalism ensure that profits attract competition, so unless a company possesses a durable competitive advantage, it will likely see its profitability deteriorate over time.
4. Attractive long-term growth prospects. Time is the investor’s friend, when investing in a business with attractive long-term growth potential.
5. Limited capital requirements, which contribute to the business’ ability to generate free cash flow. The best businesses to own are those that can make substantial profits off a relatively low maintenance capital base.
