Investment Principles

/Investment Principles
Investment Principles 2018-07-02T11:04:40+00:00

Investment Principles

We have learned through many years of investment experience that it is vital to have clearly articulated investment principles and to follow them.

Our Clients want us to be prudent managers of their funds. We seek to earn a return that approaches the historical total return on equities, but to do so with significantly less volatility. This goal has been achieved for a composite of Discretionary portfolios since 2001. Our client’s portfolios are diversified and balanced and usually generate significant income from dividends and interest.


Portfolio Investment Principles

  • Diversify by Traditional Asset Classes:
    Stocks, Bonds, Cash-like assets.
  • Diversity by Use of Low-Correlation Assets:
    i.e. certain investments do not closely follow movement of the U.S. Stock market such as real estate, foreign bonds, real assets, commodity- oriented stocks (mining, oil and gas, water utilities)
  • Avoid Overexposure to Any One Company:
    Usually no more than 3% to 6% of a Portfolio is placed into any one security. A mutual fund is usually limited to less than 20% of a client’s portfolio.
  • Liquidity is a Priority:
    Usually our client’s portfolios are 100% invested in assets that can be readily turned back into cash.

Fixed Income Investment Principles

  • Government bonds are a favored vehicle for profiting from interest rate changes.
  • Vary “duration” (effective maturity date) to benefit from perceived inefficiencies between maturity dates.
  • Use high quality corporate bonds when they offer overly generous yields above treasuries.
  • Convertible bonds may be used for combined income and appreciation from companies with good credit and positive business prospects.
  • Preferred stock may be used when credit outlook for issuer is positive.
  • International issuers are acceptable when of high credit quality and when securities are denominated in strengthening currencies or hedged against currency fluctuations.

Equity Investment Principles

  • Invest for Growth Using Intrinsic Valuation as a Key Criteria:
    While we certainly pay attention to the relative financial, operational and investment indicators for a company under consideration, these indicators must be confirmed by an intrinsic value analysis that indicates a company can be purchased for below it’s intrinsic worth. This approach is explained in more detail below.
  • Intrinsic Valuation:
    We favor and apply the Discounted Free Cash Flow approach described well in Valuing a Stock, by Gray, Cusatis and Woolridge, © 1999 and 2004, McGraw Hill. We believe this approach works when applied to a “going concern” with relatively predictable patterns of sales and profit margins. The fundamental principles of our approach are as follows:
    1. Attempt to determine value relative to an enterprise’s ability to produce distributable cash as opposed to “earnings” a figure often distorted by Generally Accepted Accounting Principals.
    2. Attempt to answer the question: “What’s the most we should pay today for a company that is likely to produce “x” cash flow in the future?”
    3. Seek additional margin of safety: purchase only when a company can be had below intrinsic value.

    Some of our selections may be valued based on their potential attractiveness to non public market investors offering the potential for a management buy out, leveraged buy out, acquisition or stock buy backs.

  • Sell Discipline:
    Sell a profitable holding as it rises to close to it’s estimated current intrinsic value. Sell a holding if new information suggests a radical change in corporate philosophy, management or integrity. We do not apply stop losses, believing a relatively small allocation to any one stock is sufficient protection against overall portfolio loss.