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2017 End Of Year Client Letter

Updated: Sep 6, 2022


There is always a bit of excitement in the investment community when it comes to thinking about what the new calendar year will bring us. Will we see an up or down year? This year, with the swearing in of a new, very polarizing President, people’s energy is high (both positive and negative). So we think it is a good opportunity to revisit our age-old core investment philosophy. These are the backbone to our investment success, and what keeps us grounded during great recessions (i.e., the Financial Crisis of 2008/2009) and euphoric markets (i.e., the Internet Bubble of the Late 90’s). So, without further ado, we hope the information below brings you the same peace of mind we have when investing in the stock market:


As we tell our children, there needs to be a reason why we do “anything” we do. When it comes to investing that why is quite simple… capital growth. Furthermore, we want to grow our capital so we have a better future. The better we are at growing our capital, the more flexibility we will have down the road. This is the real reason we invest… give yourself future options.

We like to say that you can become rich by earning a good living and saving well… but you can only become wealthy if you invest! For the 99.9% who work a regular job, investing is the vehicle to creating this wealth and ultimately achieving financial freedom!


Now that we have been reminded why we invest, how do we grow our money at a pace greater than 1) The inflation rate 3.2%, but more importantly, 2) At a meaniful rate? We invest! This does not mean we just put money to work in the stock market or we buy real estate rentals. Regardless of where you put your money, invest means we keep it invested for the long-term in order to take advantage of, as Albert Einstein put it, The 8th Wonder of the World… also known as compounding interest.

Just like inflation, compounding interest (or compounding your money) is somewhat hidden, but it is there. And as investors we need to stay invested for the long-term to realize it (and the sooner we start investing, the better).

We all know the longer you keep your money invested, the more money you will ultimately have. But do we know why? As you see in the chart above, it’s the compounding interest. Over a 20-year period, the interest related to compounding is almost as much as the regular interest + the original deposit. Truly a wonder and this is how your investments will outpace inflation.


There are many, many, many ways to invest your money. Depending on your social status in life, you may be exposed to opportunities such as private equity funds, start-up companies needing capital, hedge funds, etc. Or for those of us less fortunate (or more fortunate), we may only have access to your run of the mill liquid investments such as stocks, bonds, and mutual funds or even less liquid investments such as real estate. Regardless, the question is the same for all of us: Where do we invest our money to give us the best shot at 1) Outpacing inflation and 2) Allowing our money to compound!

Let us introduce you to the sometimes unglamorous and at other times very exciting stock market. A picture is worth a thousand words or in this case $10,000. As you can see, for every $1 invested in 1925, it is now worth over $10,000 if you 1) Invested in the stock market and 2) Kept it invested.

So, if you are sold on keeping your money invested for a period of time, why in the world would you invest in anything not called the stock market? We might be hard headed at times, but there is no way anyone can look at this chart and not be crystal clear with where to invest their money. Yes, there will be and always will be the new investment du jour that promises great returns (and may even attain them) but we like what we see here and we will stick with it.


Investors have two main choices in their stock market participation. They can either buy an index fund (or funds) and own the stock market as a whole (i.e., you can buy the S&P 500 Index and you will get that return) or, an investor can invest in actively managed funds (or have their own stock portfolio). These types of funds or portfolio is centered on individual stock selection.

For us, when at all possible, we want to craft a stock portfolio for our clients, rather than buy mutual funds (active or index). There are a number of reasons why, but the most glaring one is that a portfolio of individual stocks is the only way we can create a portfolio specific to a client’s needs. It gives us flexibility in managing a client’s savings allowing us to add a tremendous amount of value that you cannot get owning mutual funds.

Mutual funds are designed to meet the needs of thousands of people at once. A stock portfolio is designed to meet your individual needs and then is managed to continue to meet your needs as we stay invested to exceed your long-term goals.


Naturally, once you’ve made the commitment to invest in individual securities, you must have a solid approach to not only selecting investments but maybe more importantly, maintaining these investments (i.e., be steadfast in your original investment thesis when stock prices collapse). We know this through experience! Ever since we started investing in stocks via The Westmoreland Group (our original investment group formed in 1992), we have been implementing some form of our value-oriented approach to investment selection.

Today, our approach is much more robust than 25 years ago (i.e., you learn a lot through experience), but still centered on the same philosophy of buying great companies at a fair price that we are happy to hold for a long period. For anyone who has sat and talked “shop” with us, you know we can go on for hours about investing. With that being said, below is a high level overview of how we find companies for our portfolio(s):

· Thematic Investing: Most investments we make are predicated on a long-term thesis. We believe in a movement or culture change that will provide a growth opportunity for the foreseeable future. Then, we look for the companies that are best positioned to take advantage of this future growth.

These themes / opportunities present themselves in different ways. Many times they are not really too clear at first glance and other times quite easy to see. For instance, a long standing theme we have is: You have to eat & drink. This is never going away, so we know if we find a food/beverage company that meets our investment criteria we may invest in them. And, in this case, the theme is far reaching, allowing us to find companies that don’t even make food items or beverages (i.e., We invest in a company that makes the kitchen equipment for most quick service restaurants), but we find them via this theme.

In summary, we follow this approach as it’s a great way to find confidence in your investment selections. If we know a theme is solid and will be around for some time, we have a strong belief in our company companies long-term viability. Many times our thoughts on a company are contrarian to the market consensus, so this confidence is necessary in order to be successful long-term investors.

· Qualitative & Quantitative Analysis: Once we’ve “discovered” a company that peeks our interest, we analyze it from two perspectives: 1) Qualitative and 2) Quantitative. The first focuses on all the attributes of the company that do not have a number directly associated with it. Sort of like intangible assets, something you can’t touch but know is necessary for a company to be a going concern…such as quality management, a product/service that is a necessity, or a clear roadmap of future growth.

On the quantitative side, we look at peer numbers. Are the qualitative traits of the company leading to value adding financial performance? At the crux of this analysis is Economic Value Added (EVA). This is the ability of a company to produce a return on capital that is greater than its cost of capital. Lacking this trait, an entity at some point will cease to exist! Believe it or not, most companies do not achieve positive EVA.

Combined, our qualitative and quantitative analysis produces a very short list of viable investments. At most, between the companies we already own and the ones we would like to own (i.e., buy when the price is right), we may find 100 companies. This is the result of a strenuous approach to find long-term investments. The hardest part about investing is trying to find the next investment, so you might as well put the time in to find the first investment so you can hold it forever.

· Portfolio Management: The portfolio is the culmination of the above. If we are successful at selecting stocks, we can produce a portfolio that meets our main objective: capital growth. It’s that straightforward! Fortunately, we do not subscribe to all the “market jargon” nonsense regarding portfolio management. Terms such as “asset allocation” do not enter our realm.

We are steadfast in our goal of growing our client’s capital (feel free to head back to the beginning of this “refresher” and re-read why we invest in the first place). The best way to achieve this is to invest in the best companies at good prices that will allow our money to grow over time. Putting 20% of your portfolio into the International Fund just because some asset allocation table tells you to do so under the premise of being “properly diversified” is ridiculous! Proper diversification can be achieved by investing in as few as 20 stocks in different industries. It is not necessary to invest in 100+ stocks across 10 different regions in 50 different industries, etc.

Therefore, for us, we stick to what history has taught us (through our experience and market history) … it’s the companies that matter most. In our portfolio, we like to see no more than 40 securities (yes, this is greater than 20, but sometimes you hold stocks because selling them would be detrimental (i.e., taxes). And, if we have done our homework, we will hold these stocks for a long period, further enhancing the ability of this portfolio to meet your needs (i.e., lower trading costs if not making trades, no taxes, etc.).


As mentioned at the outset, we write this with the intention of giving you the clarity we have when investing. Regardless of the political climate, the economic stability (or instability), or the social injustices of the current times, our investment philosophy does not change. This writing is our ten-thousand-foot view of the why, how and what of investing. It’s easy to get caught up in the media hype, the water cooler chatter, your Facebook timeline, etc. but when you have a clear vision of your goal and how to achieve it, things tend to come into focus.


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