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Our philosophy in managing equity portfolios has a number
of underpinnings:
:: A Value Orientation
We employ a style that is heavily "value"-oriented
because we are convinced that this approach, over the long
term, produces superior returns with lower risk levels than
do other styles.
:: Reliance on Analysis
We base decisions on what we know or reasonably can infer
today, rather than attempting to anticipate the unknowns
of tomorrow. All too often, forecasters simply extrapolate
from recent trends, without special insights into future
developments. We work with what is known about book value,
cash flow, dividends, balance sheet, stock price and the
dynamics of a business.
:: Bottom-Up Security Selection
We assemble a portfolio one stock at a time, seeking value
in specific securities. At the same time, we are very much
aware of how each security contributes to the characteristics
of the portfolio. In addition, holdings reflect investment
themes because undervaluation often affects entire segments
of the market.
:: Controlled Risk
Avoiding substantial losses is vital to achieving good
investment results. To reduce the risk of loss, we buy stocks
of financially solid companies after they have declined
significantly. If the drop in price was large, the probability
of a further slump should be low. Nevertheless, it is inevitable
that some stocks will disappoint and it is very difficult
to distinguish the early stages of a large decline from
normal volatility in the price of a stock. Therefore, broad
diversification among issues, industries and market segments
is a core component of our approach to managing portfolios.
:: Market Exposure
The probability of success in timing the market is very
low. At the same time, equity exposure in portfolios we
manage can vary, within defined ranges, as the net result
of buying and selling activity. In rising markets we will
sell more stocks than we buy; in declining markets, we will
buy more than we sell. We acquire stocks only when we believe
them to be undervalued and hope to sell them after they
have appreciated.
:: Active Management
It happens frequently that a large, well-run, well-respected
company will go through a decade or more without meaningful
gains in the price of the stock. Having observed this pattern
many times, we believe an active approach to investing will
produce better returns than a buy-and-hold strategy.
:: Tax Awareness
We manage taxable portfolios with careful attention to
the tax ramifications of our decisions. We take note of
holding periods in order to benefit from lower capital gains
tax rates on longer-term holdings, will take losses to offset
gains, and consider the client's tax bracket in choosing
between taxable and tax-exempt fixed income investments.
:: Steady Progress
If we bought an issue when it was deeply undervalued and
sold it when it reached a fair price, we will have earned
a good return. We try not to, but do not mind selling too
early, because stocks become increasingly risky as they
rise in price. Our approach of building the value of a portfolio
in increments makes long-term investment success less dependent
upon an accommodating market environment and less vulnerable
to a major market decline.
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