Selecting the right stocks lies at the heart of successful money management. We concentrate only on what is relevant to client success. For example:

We Don’t:

• attempt to predict whether the stock market will be up or down
• attempt to predict the direction of interest rates or the economy
• get caught up in minute-by-minute commentary by "experts"

We Do:

• invest only in attractive businesses we understand
• seek to acquire shares of those businesses at attractive prices
• expect to hold these investments for a long time

Our Edge − We group stocks into four categories: Good, Better, Best, and Too Tough. There are over 6,000 stocks to choose from.  Using a simple sorting process allows us to quickly disregard businesses with poor long-term prospects and those that we do not understand.

We believe that investing in businesses we understand improves the chances of investment success and reduces the chances of loss. We invest within our circle of competence, and we recognize our boundaries. Some businesses in high-tech or bioscience are so technical and change so rapidly that it is nearly impossible to project whether a particular company or technology will exist in a few years, much less project its future earnings. We avoid investing in these types of businesses. We are not saying that these businesses cannot be understood; they are simply not within our circle of competence.

We like to get the easy decisions right − like making lay-ups in the game of basketball. Likewise, it is much easier to forecast how many pounds of chicken Americans will consume each year rather than predicting the efficacy of development drugs. We understand certain industries like services, basic technology, and the manufacturing, distributing, retailing, and financing of goods. We are familiar with these industries having covered them for years as analysts.

Buy Right − It is not enough to identify attractive companies; they must be purchased at attractive prices. Our observation has been that when a great company is purchased at a lousy price (expensive), the lousy price causes your investment performance to suffer. Since the purchase price determines the return on the investment, we are disciplined and attempt to buy stocks at a discount to the company’s estimated value. Because valuing businesses is an imprecise art, buying at a discount builds in an important margin of safety.

We employ rigorous analysis in determining the worth of a company. We seek to understand the competitive situation in an industry − what's driving revenues and expenses. In addition to traditional number-crunching of the financial statements, we draw on our own historical perspective and the industry contacts we have developed over the years.

Hold − Holding stocks for a long time makes sense because of a basic mathematical truism – compounding, which means earning interest on your interest. Compounding becomes more powerful the longer an investment is held because more interest is built up on which to earn interest. Even a few percentage points can make a huge difference.

The Benefit of Compounding

In one year $100,000 invested at 5% is worth $105,000 and at 10% is worth $110,000 − a small difference. Watch the difference widen as we hold those investments longer. Earning a 5% annual return is worth $432,194 in 30 years, while earning a 10% return is worth $1,744,940 in 30 years − 4 times greater than the 5% return.

When an investment is sold the compounding process is set back by the tax you pay on the capital gain. This results in less money to reinvest, which makes compounding your money less effective. Had you paid capital gains taxes (at 15%) on your 10% gain each year your $100,000 would only be worth $1,155,825, far less than the $1,744,940 you would have amassed by holding onto the investment. Our buy-and-hold strategy lets compounding work for you.

Our desire is to keep portfolio turnover below 20% annually; however, we are constantly monitoring each stock.  If it reaches our objective, conditions change, or we realize that we were wrong, we will exit the position.