Investment Philosophy
We are not out to redefine the art of investing, but the art of investment management.
As history shows, those who chase the latest “hot” investments miss what we believe are the best opportunities the stock market has to offer--purchasing quality, recession-resistant companies at a discount. Our goal is to make sure our clients own these companies when they return to favor.
This is why our approach to investment management is so focused on coaching and communicating with our clients. We are passionate about helping people visualize and reach their goals, while also enjoying the journey.
Our Beliefs
Wealth is created through capital appreciation and dividend re-investment compounded over time.
The principles of sound investing have been proven time and time again. We believe they have been abandoned by most investors in favor of hype and hysteria.
Our mission is to enable people to achieve and maintain financial security without undue risk or stress.
Our Method
The decision to purchase and hold stock in a company is based on the following Eight Criteria:
1) Strong Balance Sheet – Preferably more cash than debt or the ability to pay off debt in two years out of free cash flow
2) Long History of Profits and Dividends (or stock buybacks)
3) History of Shareholder Friendliness - Making shareholder friendly choices with available capital
4) Strong Insider Ownership (preferably with recent purchases)
5) Easy to Understand – Business meets a sustainable economic need
6) High levels of free cash flow
7) Strong Moat – High levels of profitability maintained by barriers to entry
8) Low Price-to-Earnings Ratio (or price-to-sales/cash flow/book value) in comparison to the last five years
Every company we consider must rate favorably in the above areas. Companies are sold if they deviate significantly from these criteria, or if their stock price becomes unreasonable due to dramatic price appreciation in relation to underlying fundamentals.
Our Approach
It has always been our approach to try to achieve results by developing and applying knowledge and insight in three core disciplines: History, Psychology and Mathematics. We also value a fourth discipline, Communication, as the means of ushering our clients through the process.
History
In the words of Mark Twain, “History never repeats itself, but it rhymes.” No two situations are exactly the same. Must we then abandon the lessons of the past by dwelling on the differences between then and now? Smead Capital Management says no. The law of supply and demand will not be violated in the long run and business cycles will not be repealed. To be a visionary, one must be able to recognize the true ‘rhymes’ of history within the current context, and demonstrate the courage to take appropriate action.
Psychology
If the stock market behaved strictly according to the laws of Economics, investing would be easy. It’s human behavior that creates the uncertainty. Through constant observation and analysis, we are always striving to refine our understanding of the stock market in terms of crowd psychology to better predict and respond to changes. The ability to feel the pulse of the investor community is an invaluable skill.
Mathematics
We have a deep respect for mathematical probabilities. They play a major role in our Eight Criteria, described above. We believe sound mathematical analysis helps us discern public perception from economic reality to uncover companies with the fundamentals to outperform other stocks in the long run.
Communication
Given the long-term nature of our investment strategy, it is especially important to clearly communicate our reasoning so that clients will understand why we act (or choose not to act) in response to various market conditions.