1) I am simply cheap.  I have been this way my entire life and “cheapness” is fundamental to being a successful value investor.  Buying at low prices relative to intrinsic value holds the key to earning dependably high returns, limiting risk and minimizing losses.

2) I am an unequivocal and unapologetic generalist.  Most great investment managers are generalists.  My comprehensive generalist skills provide value when applied through the following disciplines:

a. Historian:  Knowing what happened in the past allows one to extend the range of possibilities of what might happen in the future.  Digestion of history provides a framework of market cycles, associated risk and opportunities.

b. Psychiatrist: Investing opportunistically – or buying when markets are down and selling when they are up – takes psychological moxie.

c. Investigator:  Frequently called research in the investment business, investigation requires dogged skepticism, logic application and alternative derivation – the equal application of all three results in discernible investment value.

d. Accountant:  Understanding gains/ losses, appropriate portfolio concentrations and what reasonable value to assign a company’s cash flows are not complicated but are fundamental to successful investing.

There is no substitution for constant reading to immerse myself in the flow of information that eventually results in ideas. SEC public company and manager filings, industry research reports (for the numbers, not investment opinions – this is an important distinction) and publications such as Barron’s are all sources of investment ideas.  Fundamentally all investment ideas should have the following criteria:

  1. Strong fundamentals (high cash, low debt)
  2. Consistency in operations
  3. Sustainable and substantial “moat” / advantage
  4. High return on capital
  5. Understandable products
  6. Strong and honest leadership
  7. Substantial free cash flow generation

We want to sell stocks when they’re fairly valued, but we’ll admit that determining that is as much art as science. We traditionally cut back or fully liquidate a position when fundamentals have deteriorated, a previously identified catalyst has taken place to unlock value or the stock has appreciated at least 20% and has been held for at least year (to minimize the tax effects of selling).

Technical analysis can be useful from time-to-time as a contributing barometer of a particular security’s investment merit in that it is simply favorable to buy a security lower than higher in price.  This is only one, and likely the very last, piece of investment criteria reviewed prior to investment.  Historical price movements are important, but not critical, to our investment in that particular security.  Additionally, investing solely based on technical analysis usually involves frequent trading which is expensive.

Yes, we use analysts’ forecasts and sell side research to get the analytical numbers but we form our own opinion from those numbers provided.  We never rely on buy or sell lists from analysts and always have healthy skepticism on sell side research forecasts.  Analyst’s forecasts are usually optimistic requiring a healthy downward adjustment to ensure a margin of safety.

Our typical holding period is between 12 and 24 months as that is both how long it usually takes an undervalued investment to be fairly valued by the market.  Tax-efficiency is secondary, but very important, in determining investment holding periods.

Yes, we welcome low-basis securities to be transferred to us.  No, we do not mind if these low-basis securities result in higher concentrations in the account.  We can manage these low-basis securities by (a) selling them slowly over time to minimize taxes (b) selling call options (if available) on these securities to produce additional income or (c) simply retain them in the portfolio for periodic assessment.

We are not asset allocators or financial planners. We do not sell insurance or sell investment products. We do not represent any particular mutual fund family or have our own proprietary mutual funds. We do no investment banking and do not make money on brokerage fees.

Charles Schwab serves as the custodian/ broker of our client assets.