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We believe that a company’s share price will follow earnings over the long run. We therefore
focus on identifying companies with fundamental characteristics that often
result in generating above average profit growth. We place little emphasis on forecasting the direction of the stock market or the economy because we believe that short-term market gyrations do not affect the long-term prospects of an investment.
We favor investing in companies with:
• high rates of
return on equity and capital;
• strong free cash flow;
• a sustainable franchise;
• dominant market share; and
• above average profit margins.
Also, we seek out companies that have a history of solid corporate governance and conservative accounting practices.
A Long-term Strategy
We invest for the long term and view each investment as a partial ownership interest in a business.
We believe that this approach is most sensible and the benefits of compounding capital over a long period
of time and in a tax-deferred manner can be substantial.
While many investment managers buy and sell investments on a regular basis, we tend to hold our investments for a number of years. Our portfolio turnover on an annual basis is typically around 25% and most realized capital gains are long-term in nature.
Investment Alternatives
If we are unable to find companies that meet our stringent investment criteria and sell for a discount
to their fundamental value, we will temporarily hold up to 10% of assets in cash (money market securities)
and/or U.S. Government obligations.
Selling Discipline
We believe that disciplined selling is critical. Therefore, we
sell investments only when either of the following conditions are met:
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the company’s fundamentals
have deteriorated, or are expected to deteriorate, significantly;
and
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the sale and subsequent reinvestment of sale
proceeds, after taxes, are estimated to result in a substantially
greater future value. In this case, the risk relating to the new
investment must be lower than, or comparable to, the initial investment.
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