Protective – Our first instinct is to preserve a client’s capital. Our objective is to produce consistent positive returns with subdued volatility in portfolio values. As a result, we do not chase market indexes;
Vigilant – We examine each investment in detail to insure that, when we invest, there is a substantial "Margin of Safety", a concept originally described by Benjamin Graham, the father of value investing. Strong balance sheets, viable business models, positive free cash flows, management dedicated to shareholders, low debt levels, competitive advantages, and attractive growth prospects are all key ingredients in our decision processes;
Disciplined – Even strong companies can become overvalued. When we perceive this condition, we pare such positions in client portfolios. This distinguishes our approach to investing from a "Buy and Hold" philosophy;
Value Oriented – We use Benjamin Graham's "Margin of Safety" because it is difficult to pinpoint, with precision, the intrinsic value of any particular business or company. As a result, we prefer to invest at a discount to the intrinsic value we have estimated because buying at a discount to our estimated intrinsic value can make up for lower than expected company results, and, if our analysis is correct, often results in higher than normal returns. Buying with that "Margin of Safety" is, we believe, the best way to protect capital and provide excellent long term returns;
Attuned – Our professionals stay religiously attuned to market conditions and invest according to the fundamentals, even contrary to the market’s mood of the moment. Our writings are often on the cutting edge of market thinking, giving our portfolios the advantage of being early in investment trends;
Accountable – All investment decisions are made in-house. We do not farm out portfolios to other managers. We take responsibility for the performance of the portfolio according to our established risk and return characteristics.
Because most clients understand how hard it is to create wealth, they would rather have a consistent return as opposed to highly volatile ones. Thus, our core value of “Protection” of portfolio principle evolved.
In the 1980s and 1990s, it became the conventional wisdom that “buy and hold” and high portfolio allocations to equity produced the best returns. And who could deny it? In the 1990s, for example, equities averaged 20% gains per year. But all that changed at the turn of the century. The markets peaked in March, 2000, with the bursting of the Tech Bubble and then again in October, 2007, with the popping of the Housing Bubble. Thus, twice in the last decade, investors have seen declines of more than 45% in the values of their equities. Still, today, many supposedly sophisticated advisers continue to advocate “buy and hold” and high equity allocations.
We live in a world overburdened with debt. For years, Americans have overspent their incomes, financing that consumption by increasing their debt burdens. Meanwhile, their real incomes have stagnated. And the assets used to support the borrowing have lost significant value; in many instances, the debt owed against those assets is greater than the asset’s value.
Corporations, too, overleveraged during the period when the Federal Reserve’s “easy money” policy kept interest rates artificially low. Despite the near meltdown in the financial system in the fall of ’08, which significantly reduced the capacity of the world’s financial system to lend, artificially low interest rates continue to be the economic policy prescription. History shows that such policies never end well.
There are three significant consequences from the above described economic policies:
In such an age, our core value of “Vigilance” helps to protect our client portfolios, as, using bottom up techniques, we examine the balance sheets and cash flows of potential investments and stress test them for top line revenue declines. Using top down (macroeconomic) analysis, our core values of “Discipline” and “Value” help us to determine when to purchase a strong company’s debt or equity, and, if its price rises to overvalued levels, when to sell. In addition, our “Protective” core value requires that we choose non-correlated investments in order to reduce violent value swings.
Finally, we believe that the alignment of our interests with that of our clients is a core value. As a result, unlike at most other shops, we do not take 12b-1 fees or any other form of payment from outside sources for investing client assets. We make no money on trading; clients are charged the low trading fees we have negotiated with our broker/dealer. Our major source of income is the low management fee we charge. As a result, only when client assets rise in value does our income increase. We believe this adds value and aligns our clients' and our interests.