To Our Current and Future Subscribers
With our partners and our subscribers, the most challenging thing we deal with is people forgetting their strategy and what they set out to do. If you want to take big chances and turn $100 into $200 go to the casino. We are not interested in such activities. Our goal is generating long-term wealth. We are in the business of finding great businesses. A great business will beat inflation.
Our approach is difficult for most people because it requires patience and people can mistake patience with lack of progress. If we can assist and prevent people from taking unnecessary risks, they will avoid catastrophic losses, and place more money into sound investments that compound value rather than see it deteriorate.
What is it about our human nature that wants us to overlook the obvious and search for the impossible? It’s common practice in the investment community to think that there needs to be a hidden secret, an uncovered gem, in order to make a great investment. If you pick the clear winners and avoid catastrophic losses you will do terrific. Brilliance is not required, just loss avoidance. Eventually – the business performance will matter. Stock price may move rapidly up or down, but most businesses rarely move that quickly. A few great businesses in a portfolio can fund a retirement if the investor has the patience to hold and continue to re-invest profitably.
So How Do We Find Great Businesses?
First, it is our passion. We are an odd bunch of intellectually curious individuals who love to research great companies. We look for characteristics such as an economic moat. An economic moat represents a durable competitive advantage that a business possesses that makes it difficult for rivals to capture market share and cut into potential profits. Keeping the competition at bay allows companies with wide economic moats to consistently capture greater portions of their economic value, and hence, generate superior returns for their shareholders over the long haul. Seeking out companies with wide economic moats is a strategy widely adopted by legendary investors such as Warren Buffett and Peter Lynch.
Our Selection Process
The fundamental basis of our investment selection is based on free cash flow generation. If you think about why people invest in the first place, the fundamental premise is that you will outlay cash now and expect to receive more cash back in the future. If you want to know precisely what you will get back you can buy bonds, certificates of deposit, participate in annuities, etc. The good thing about these investments is the future cash flow receipts are known. With stocks, you are unsure exactly what cash flow the business will produce in the next year and how the market will react to this cash flow generation. That is where our analysis comes in.
We can look at the present value of the future cash flows we expect a business to generate and determine a rough estimate as to what that business is worth today. We quantify risk as how much volatility exists in our future cash flow expectations. When we find companies that trade at a discount to their future cash flow at what we believe to be a low level of risk we get excited and continue to dig deeper.
Return On Invested Capital (ROIC)
A metric that helps us determine the competitive strength of a business is the five year average return on invested capital that management has generated. If the management team has successfully taken shareholder provided dollars and turned it into profits at healthy rates in the past with no fundamental changes to the business landscape we will expect them to continue to do so in the future. The risk here is that a variety of factors both known and unknown will have an impact on a competitive moat. These include patent expirations, new regulations, new competitors, shifting customer demands, etc… Another big risk is the timing of when these external forces might impact the competitive strength of a business.
For example, most people are well aware of the fact that Tesla and the push towards electric vehicles will have an impact on the auto industry. However, what few people can predict is the timing and impact that this shift will really have on the global competitiveness of auto companies. Tesla has taken loads of cash from investors and has produced no net positive free cash flow to date. For those reasons, we avoid “exciting” companies with big question marks like Tesla. We prefer other “exciting” companies with proven cash flows and strong growth projections such as Facebook. Facebook is a low capital business with strong cash flow generation and growth across various platforms from their core business to Instagram and WhatsApp. The management team has done a tremendous job of monetizing their user base through advertising and we are pleased with our results from hanging onto them.
Free Cash Flow as a % of Revenue
Our goal is to find, invest in, and recommend businesses that we predict will continue to generate strong free cash flow. As such, a very important metric we examine when researching a company is free cash flow conversion (as a percentage of sales and as a percentage of net income). Companies use cash for the following purposes: To invest in the capital requirements of the business, to support new and existing product developments, to buyout companies, to issue dividends, and to buy back stock to offset the dilution of option exercises. If a business has a low free cash flow conversion rate we tend to lose interest rather quickly. When someone whispers a good company to us and we start to investigate it, finding out it has poor free cash flow conversion is like heading to a blind date and finding your date has turned out worse than the photographs promised. Unless we are really impressed with other findings that come about through further research we decide to invest elsewhere.
We love what we do which is finding great businesses and articulating their worth in plain English. We look forward to you partnering with us by subscribing and benefiting from our research services. With a sound strategy, patience, and investing discipline we can make your journey of growing assets easier to manage so that you can reach your financial objectives. Helping others achieve financial success gives us great pride!
How Do I Join?
Our service is geared towards growth oriented investors with a time horizon beyond 10 years. We are currently offering a 30 day free trial!
When I Join What Will I Receive?
Email or texts alerts whenever we buy or sell any position in our growth portfolio.
Exclusive growth picks offered only to our subscribers.
A monthly portfolio review versus the S&P 500 which includes the impact of all of the buy and sell decisions we have made.
A monthly market update, buy watchlist, and market commentary from our team.
Updated monthly five year price targets on all holdings.
How Is It Going So Far?
In 2017 our performance was 37% compared to the S&P 500 performance of 22%. While we are pleased with what our research has produced, we know that it will take many years of out performance to gain the full trust of our subscribers.