Investment Philosophy
We are disciplined value investors. That is, we focus on stocks that are inexpensive on a price to earnings (P/E) and price to book (P/B) basis. Within this universe we are looking for stocks that have a catalyst that we believe should result in stronger than average earnings growth over the next few years. While our philosophy is based in large part on our experiences, we are also influenced by the advice of the legendary Ben Graham, who gave a speech in the mid-1970s summarizing his 50 years in the investment business. His view was that if you followed two simple principles, you would not only do well but would outperform most other strategies. The first principle he stressed was using an investment discipline of not overpaying for a company's stock, since that is the Achilles heel of the investment business. The disciplines he recommended were P/E, P/B, and dividend yield. He explained that this should get you halfway there. The second principle he stressed was to be a long-term investor. Graham pointed out that markets on a one or two years basis can be completely unpredictable. However, if one takes a longer-term view, i.e., five years, the investor should have enough time to potentially benefit from earnings and fundamentals rather than emotions like panic, fear and greed.
Taking Graham's advice, we undertake academic studies showing the advantages of a) buying the lowest P/E and P/B stocks and b) being a long-term investor. We study the bottom 20% of the S/P 500 on a P/E and P/B basis. Specifically, we calculate returns that would result if one holds the bottom 20% of the S&P 500 for a year, then rebalances to the bottom 20% each year. The results of our studies, which began over 40 years ago, are spectacular. Investors in this hypothetical scenario would typically be rewarded with an edge over the market when using these P/E, P/B, and dividend yield criteria. The tricky thing remains that yearly performance is all over the place. To deal with this volatility, we listen to Graham's second piece of advice to be a long-term investor. And, thus we calculate the performance for rolling five-year periods. For the rolling five-year periods since the studies began, there is only one period (2004-2008) with negative returns. The message from these studies remains that a good way to address risk is to be a long-term investor and to invest with a price discipline.
There is no assurance that the investment process will consistently lead to successful investing.