A Share in a business
We firmly believe that profitable investment opportunities exist from time to time each year in the purchase of the common stock in well-established companies. In tracking a number of such companies closely we see the prices of their stock fluctuate far greater than the value of their underlying businesses. Wall Street traders are quick to sell such businesses when a single earnings report or news announcement presents a temporary disappointment in the future outlook of such a company. Yet the examination of many of these companies historical records presents a strong case for the superior management capability and product strengths to warrant purchase at the right price. Our job is to seek out and purchase such companies for our clients when our research validates that the price is low relative to the business value. Having done such work for a number of years, we have found certain characteristics in common among the companies which have consistently provided the best investment returns for our clients. These companies typically possess most or all of the following:
The investment management principles practiced by our company derive from the work of the late Benjamin Graham, author of Security Analysis. Our research seeks to appraise the worth of a company, what Graham called “intrinsic value,” by determining its acquisition value, or by estimating the collateral value of its assets and/or cash flow. The process is more closely related to credit analysis, for as Will Rogers once said, “I’m more concerned about the return of my money than the return on my money.”
Margin of Safety
Investments are made at a significant discount to intrinsic value, normally 40% – 50%, which Graham called an investors “margin of safety.” This principle results in a contrarian approach to investment, forcing the purchase of securities in general price decline, and conversely forcing sales as stocks achieve unrealistically high valuations.
Dominant Market Niche or Unique Franchise
If you could own the perfect business it would be a monopoly. With no competition you could set prices at any level you chose, and if people had to have your product they would pay the price. You would not have to worry about poor management, bad marketing, cost controls or other basic business considerations. Fortunately, the government regulates the prices monopolies such as your local electric utility or the phone company can charge; consequently, true monopolies are a thing of the past. However, a number of corporations have over long periods of time created consumer franchises with limited competition. In other words, their products are readily identified by the consuming public or they have unique and limited territories which would be virtually impossible to duplicate by a potential competitor.
We first look at a company and their business prospects for the forseeable future. We then ask ourselves, “if we could buy the whole company, would we and at what price.” This leads to our value analysis, which is mainly an effort to really understand the cash-flow of the company. Excess cash-flow provides opportunities for debt-repayment, share repurchases, capital expenditures to grow the business, and/or dividend growth for the benefit of all shareholders. This long-term look at the company from an ownership position leads to rather long holding periods and steady annual portfolio progress.
Going forward we will focus our energies and efforts on determining which businesses to invest in (good businesses), with whom (shareholder oriented managements) and at what price (margin of safety).