First and foremost, we are value managers, investing in high-quality companies we believe are significantly undervalued. Our approach is the purest form of value management and centers on understanding the natural behavior of markets and investors. Consequently, we consider the following points in determining the value of potential investment candidates:
Understanding human emotion is key to being successful in the investment management business, since investors tend to overreact in their optimistic views as well as in their pessimistic views. As investors overreact to near-term events, they create overvalued and undervalued security prices in relation to a company’s long-term outlook.
Price and Risk
Most of the companies we buy are high-quality, large-capitalization companies. These securities move in and out of favor over time. Risk is related to price.
We believe that in a given ten-year time frame major corporations go through periods of being in favor with Wall Street and periods of being out of favor. We further define a stock’s valuation by analyzing five financial ratios: price/book, price/sales, price/cash flow, price/earnings, and dividend yield over this ten-year time frame.
Fundamental Analysis Uncovers Value
Finally, an in-depth study of a company’s fundamentals and future prospects allows us to determine its true business value.