Value Investing Process
Our value investment process emphasizes fundamental research, using both
quantitative and qualitative techniques.
We track stock prices and earnings information on several hundred companies. We also attempt to define broader, long-term trends that influence the potential for certain companies to create value over the long term. Therefore, our investment process while predominately bottom-up incorporates a top-down component as well. We perform extensive research into the company fundamentals, reviewing financial statements and analyzing regulatory documents. We converse with company management, employees, customers and competitors through visits and investment conferences.
The relationship between price and intrinsic value is the central focus of “value investing” as taught by Benjamin Graham, the father of value investing; we are also very attentive to certain qualitative factors. We seek companies with the following characteristics:
- ü A business having some control over its own destiny by virtue of a niche or franchise that insulates it from competition and allows it to price its products or services adequately.
- ü A business that generates more cash than it needs to conduct its operations.
- ü A business we can understand. This eliminates many high technology companies.
- ü A business that has honest, intelligent management who treats shareholders as partners in the business, rather than necessary evils.
- ü A business that wisely invests their capital and reap superior returns on their investment.
- ü A business with a lean expense structure that can keep expenses low is better able to compete in difficult periods.
- ü A business that has a strong balance sheet to enable a company to weather difficult economic cycles.
- ü A business that has a proven ability to expand internationally reduces the risk of being tied to the U.S. business cycle.
- ü A business that uses technology to reduce costs, increase efficiency, and improve sales.
If a business meets these criteria, and its stock is available at a very attractive price, we are interested.
The beauty of our value investing approach is that it depends on common sense and patience rather than special sources of information or predictions of (essentially unpredictable) future events. Applied intelligently, it reduces the chances of permanent loss of capital, and has consistently produced good long-term results.
It is important to remember that value investing is still more art that science and we have very little control over short-term investment results. Emotions tend to determine stock prices in the short run, and our job is to take advantage of the irrational price changes that occur. Short-term declines can be great opportunities to invest capital, and periods of exuberance sometimes allow us to earn our returns sooner than expected.
Our sell discipline is as follows: we consider selling an investment on the basis of deteriorating fundamentals, a negative change in company management, or excessive valuations.
|
