Decision Making Process
Our process begins with a database search and daily review of securities that have reached their new low. Should a holding meet our criteria we will then review their SEC filings, company website and then contact the company directly. We then conduct a valuation of the company to determine the feasibility of investing in the company. We also analyze the company’s price/book ratio, price/sales ratio, debt level, and insider buying to name a few. After completing the valuation we determine a price we are willing to pay for the stock and when the market value of the security reaches that price we begin to take a position in the security.
Buy Discipline
When we identify value, we take a “buy and hold” investment approach. Our research leads to securities that meet our value criteria:
- Prices of financial securities are subject to significant and fickle movements.
- Despite the volatility in the market prices of financed assets, companies do have underlying or fundamental economic values that are stable and can be measured with reasonable accuracy by a diligent and disciplined investor.
- The strategy of buying securities only when their market prices are significantly below calculated intrinsic value will produce superior returns over the long run. Graham referred to the gap between value and prices as “the margin of safety.”
- Quality finances/balance sheets and the level of insider buying.
- History and reputation of management.
- Quality of products or services.
- Competitive position in industry.
- Quality of earnings.
Sell Discipline
If the price of an equity we purchased moves down, but our reason for buying is still intact, we will not necessarily sell. In fact, we may continue to hold or buy more. Sell factors include:
- When an equity security appreciates to a high proportion of the portfolio’s total value, we will scale back the position.
- When business fundamentals that prompted us to buy a given stock are no longer present, we sell.
- When fully invested, we may sell an equity if we have discovered another investment to be more compelling.
- When the security is fully priced and chances of further appreciation are limited .