We select individual securities which fulfill the regional and sector allocations that our target portfolio indicates will be the best investment choices.
- Minimize risks associated with stock selection
- Maintain a bias toward relative safety and stability
- We confirm that the individual company is positioned to benefit from the positive characteristics that led to increased portfolio weight for its sector and region. Large, dominant companies minimize the risk of losing the benefit of a correct scenario analysis because of the more erratic and uncertain results typical of smaller companies.
- We assess the quality of the management, of accounting policies, and of the sustainability of the company’s business and growth.
- We are inclined not to own companies that grow earnings by reducing the investment in their business or by systematically increasing balance sheet leverage.
- We prefer to own companies that grow by reinvesting earnings from a sustainably high return on capital.
- We forecast an expected three to five year return for our stocks based on a number of different scenarios specific to the stock over an intermediate time horizon.
- Our rule for purchasing a stock is that it should have an estimated minimum intermediate return at least 5% per year greater than a comparable maturity U.S. Agency bond.
To support the intermediate forecasts for individual securities, we produce a set of global political/economic scenarios for the next 5 years and update them approximately once every year. These scenarios are very similar in structure and intent to the one year scenario forecasts. They provide a useful check on our short-term estimates of the relative values of different asset classes and sectors. They serve as guidelines for company scenarios in some cases while issues relating to a particular company or industry may suggest unique scenarios in other cases. However, in all cases the global five year scenarios provide a context for thinking about the levels of stock valuation, interest rates, inflation and price levels five years hence, ensuring that different stocks are being valued in the future against a common valuation standard.