Value Investing Since 1974


The foundation of our value-based investment philosophy is built on five guiding principles:

use a business
use a margin
embrace vol
focus price
put time on your

Use a Business Approach

Stocks are more than just names, pieces of paper, or symbols; they represent ownership in companies. As such, we use a business approach when buying and selling companies. At the core of this approach, we seek to determine the intrinsic value of the business, taking into account both quantitative and qualitative factors. The valuation methods used to determine the intrinsic value of a company include one or more of the following:

  ► Historical Analysis   ► Segment Analysis
  ► Free Cash Flow Analysis   ► Acquisition Analysis
  ► Leveraged Buyout Analysis   ► Discounted Cash Flow Analysis

Specifically, we focus on the fundamental principles of balance sheet, income statement, and cash flow analysis, as well as current and historical financial ratio analysis and the financial ratio analysis of mergers and acquisitions that have occurred in a company's specific industry. In addition, we seek to understand the key revenue drivers of the business, its risks/headwinds, its potential rewards, its unique characteristics, and the industry dynamics in which the company participates.

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Use a Margin of Safety

Investments are made when companies sell at substantial discounts to our estimates of their intrinsic values. When we buy a company at a discount, we have created an investment opportunity that we believe helps create a favorable reward-to-risk scenario.

While the margin of safety does not guarantee the success of an investment or that the price of a security will not go down temporarily, it does help protect against the effects of unforeseen events that are out of our control such as earnings surprises, competitive pressures, higher interest rates, inflation, war, extreme weather or geological related events, political upheavals, etc. By using the margin of safety principle across a diversified basket of stocks, we believe we are able to put the odds in our favor that, over the long run, our investment portfolios will be a success.

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Embrace Volatility

We believe securities are not always priced to accurately reflect their true intrinsic values. At the extremes, this price distortion can be irrational. Thus, price is not always the same as value. We refer to this as the value gap and seek to profit from this difference between price and value. Over time, we believe successful investing is predicated on buying a stock at a discount to its underlying intrinsic value and then selling that stock when it approaches its intrinsic value. Market volatility helps provide this opportunity.

Volatility occurs as many investors let their emotions overcome logic when deciding to buy or sell a company. We believe this is more likely to take place when investors do not understand the values of the companies they are holding or trading. Understanding the intrinsic value of a business provides an investor with a fundamental basis on which to determine whether a company is cheap or expensive. Benjamin Graham referred to the result of this emotional trading in the market as "manic-depressive swings" (i.e., volatility). It is during these "manic-depressive swings" when we usually see the greatest disparity between price and value, and therefore the greatest opportunity.

"Uncertainty is the friend of the long-term investor."
- Warren Buffett

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Focus on Price

Paying too much for a great company can lead to a poor or mediocre return. However, we believe buying a lesser known company, one with a short-term problem or one that is temporarily out of favor, for a bargain price (i.e., paying 30% to 60% of the intrinsic value) can potentially lead to a great return. Furthermore, it has been our experience that investing at bargain, or as we like to say "wholesale," price levels helps reduce risk, increase potential reward, and put time on our side.

Among our five guiding principles, we put the greatest emphasis on price. Here is why:

  • Assume you have an investment that will generate $10,000 of free cash flow (i.e., income that can be paid out as a dividend or, in the case of a bond, a coupon payment).
  • Everything else being equal, if you desire a 10% return, you can pay $100,000 for that investment (e.g. $10,000 income divided by $100,000 investment = 10% return).
  • Also assume this free cash flow, or coupon payment, is fixed at $10,000 and you desire a 20% return. You can only afford to pay $50,000 for that investment (e.g. $10,000 income divided by $50,000 = 20%).
  • Last, if you desire a 40% return, you can only pay $25,000 for that investment (e.g. $10,000 income divided by $25,000 investment = 40%). The price you pay will ultimately determine your return.

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Put Time on Your Side

While we offer several investment strategies within our practice, our core investment time horizon is typically three to five years. This can be seen in our low portfolio turnover. Thus, we consider ourselves long-term investors.

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