The most successful investors think of themselves as business owners even if their ownership stake represents a small part of the total shares in a company. We analyze a prospective stock purchase as if we were going to buy the entire company, before buying any part of the company for our clients. We are less concerned with the recent strength or weakness of a stock price and more concerned with the longer-term value of the underlying business. This approach to
investing stands in stark contrast to all the momentum investors who buy stocks experiencing strong upward price action while selling stocks that are trending down. There are many variants of momentum investing, but given the large spike in volume that accompanies most sharp stock moves, it is safe to say that momentum investing is practiced by many individuals and investment managers. We typically buy stocks when the share price has fallen, volume is subdued, and investor psychology has turned negative toward a particular company.
We view the pricing of stocks as a perpetual struggle between the fundamental math underlying stock values and the shifting of investor psychology. When the mathematical ratios are favorable for a stock and investor psychology is unfavorable, we believe a potential buying opportunity exists. Conversely, when investors grow to love a certain company’s stock, and the price runs well ahead of actual progress at the company, we think it is time to exit the position or at least reduce the size of one’s holding.
Our objective for clients is to build a portfolio of stocks that represent a share of a substantial and growing stream of revenue and profits. In some cases we may focus on the consistency of this stream, in other cases the growth of it, or the sheer size of the stream. While there are a few companies that have all the elements one is looking for, most portfolios are made up of a diverse mix of stocks that in total will hopefully achieve the goal of part ownership of a sizable, growing, consistent stream of profits.
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