Our Investment Philosophy:
For Investors Seeking Value
Our approach to value investing for our clients’ individually managed accounts is “active money management” and can be summarized in one sentence: We “Cherry Pick” the highest quality companies in order to buy them at a discount, relative to what our analysis determines the company to be worth. Our Motto: “Best Picks. Better Results.”
Value investing was introduced by Benjamin Graham in his book The Intelligent Investor, first published in 1949. Graham’s underlying premise is that, as long as there is human psychology involved in the investment decision process there will always be times of extremes when stocks will be overvalued by “irrational exuberance” or undervalued by “undue pessimism”. These dynamics have been clearly recognized over numerous market cycles by value investor greats like Sir John Templeton, Warren Buffett, Charles Brandes, Seth Klarman and others; and which disputes the “efficient market hypothesis” that many money managers rely on today.
There is a clear distinction between investing and speculating. Our approach to value investing treats each investment as a partial ownership of a company’s business and clearly defines the difference between intrinsic value (our analysis of what the business is really worth) and the market value (what the market is indicating the business is worth). Using these criteria, we purchase shares of companies for our client portfolios only when they can be acquired at a significant discount to their per share intrinsic values (which is our “Margin of Safety”) thus providing the upside potential and hedge against any variations from our initial valuation, thus providing a basis for our goal of protecting clients’ capital.
Our approach is contrarian in nature since we attempt to take advantage of investor overreaction. As Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” We believe that many investors often overpay for the latest, trendy businesses (e.g., technology stocks leading up to the tech bubble) while ignoring undervalued and out-of-favor businesses (e.g., banks and financial services companies trading at “bargain basement” prices during the previous market downturn). History has taught us that popular “in vogue” businesses often have inflated prices that frequently include substantial downside risks. We not only avoid “herd mentality” but seek to take advantage of it. Our research identifies opportunities that are analyzed based on a company’s audited financial statements, other fundamental disclosures and required filings with the SEC, whereby we take a “bottoms up approach” in our analysis. We buy shares in the company only when we can determine there is a sufficient Margin of Safety.
What also differentiates the Institute for Wealth Advisors Managed Portfolios from many other actively managed accounts is the emphasis we place on dividend yields. Dividend paying companies are generally more mature, less volatile and more financially sound. Consistent and reliable dividends provide a foundation for the company’s stock price. We also view the dividend as an indicator of value and for support in down markets. The dividend payment is real cash flow to you, the “share owner” of the company. A company’s cash flow is different from earnings which can be artificially manipulated on the financial statements. A long and consistent record of paying dividends shows that a company has substance.
We especially like companies that have a history of consistently increasing the dividend payout ratios to the share owners of the company. Investors should realize that quality dividend paying companies ought to be a major component of their total investment portfolio considering the fact that since the 1930’s, dividends have accounted for about one-half of the S&P 500 total returns. So, investors who ignore good, solid dividend paying companies are doing so at their own financial peril.
Our Investment Processes:
First, as active money managers we refrain from utilizing passive investment vehicles like indexed mutual funds or ETFs. We follow the principles outlined above in analyzing companies for inclusion in our client portfolios. We require at least a 30% Margin of Safety (a discount to our estimate of a company’s intrinsic value), and we focus primarily on businesses that have strong operating cash flows and large “economic moats.” Our primary job is not to predict the future or try to guess what the market is going to do, but rather we view each company owned within our client equity portfolios through the lens as business owners, focusing on both qualitative and quantitative valuations of:
- Free Operating Cash Flows (OCF vs. EPS) since earnings can more easily be manipulated
- Access to the capital markets and balance sheet quality (we like companies with low or zero debt)
- Economic moats (a company’s unique competitive advantage within its industry group)
- Quality of management (leaders making consistent, intelligent decisions that grow and protect the business)
- The company’s business model must be simple and easy to understand (complex businesses that require a team of MBAs to analyze may be too complicated and may carry associated risks)
Second, since we seek absolute returns for our clients over the long term, we may at times hold larger cash positions in clients’ accounts due to peaks in market cycles where there is a wide universe of fully valued or over-valued companies. We like to invest during market declines when stocks are “cheaper.” Also, we refuse to “hug” a benchmark in order to match the index returns but rather invest where opportunities prevail in order to pursue superior returns for our clients.
Third, we believe that successful value investors must have a long-term investment time horizon of at least 1-2 full business cycles. Given that a business cycle can last from 3-5 years, our clients should consider themselves “share owners” in a diversified portfolio of businesses rather than trading “the market”, in stocks or ETFs.
Fourth, our selling decisions are equally as important as our buying decisions. We are not “buy and hold” managers. Our sell disciplines determine which stocks exit your portfolios, and when….
- The price of a stock in the portfolio reaches or exceeds our analysis of the company’s intrinsic value
- There is a fundamental change to the company’s business, the industry, competition, etc.
- There is a more attractive opportunity (a wider Margin of Safety in a stock of another company)
In summary, our value investing strategies are based upon disciplined analysis and consistent processes, taking a long- term investment approach:
- We buy the business as a business owner with a view to each company’s full business cycle.
- We buy the stock of a company at a discount, only when there is a significant Margin of Safety.
- We invest in quality companies that operate ethically, morally and socially responsible.
- We like dividend paying companies that have an established record of dividend growth.
- We avoid market noise and are not influenced by day to day fluctuations in market prices.
- We adhere to our sell disciplines. (see above)
- We seek absolute returns with a view of protecting clients’ capital.
We are pleased with our performance results and remain highly confident in our philosophy and processes in selecting quality companies for inclusion in the iwainc.com Managed Portfolios. As guardians of our clients’ capital, we look for buying opportunities in various market cycles and will continue to take advantage of bargains as they appear. We would be pleased to discuss your questions and comments regarding our iwainc.com Portfolios in achieving your financial and investment goals.