Capital Appreciation Strategy
|The goal of the Capital Appreciation strategy is to make money in a disciplined, patient manner. We want to do our homework and avoid overpaying. That way, when the next bear market comes along, we can stay the course and wait for temporary price declines to recover. We may well add to our positions if we believe great businesses are on sale at attractive discounts.Desired Attributes – We seek investments in companies that are inventive, adaptable, dominant and have a realistic probability of generating outsized returns for shareholders over time. Over time, such businesses commonly generate appreciation by multiples of the initial investment, and such gains enjoy favorable taxation. These companies often share certain key traits:
Value – Our research process concentrates on one critical question: “What is this company worth?” To answer it, we must first develop a comprehensive understanding of the business -- the key ingredients (the intangibles) that make for successful investing – the “moat” that the business has, how well management stewards shareholder capital, and how risky are its long-term prospects. The bulk of any company’s value is determined by its future prosperity.
Conservatism/Margin of Safety – We look to build a margin of safety into our purchase price. We start by using a reasonable set of assumptions in our financial projections. Then we bolster that margin of safety by employing a challenging hurdle rate—a relatively high expected return over time. A challenging hurdle rate reduces the initial purchase price that we are willing to pay, which hopefully results in an acceptable return even if our growth assumptions prove faulty.