“While enthusiasm may be necessary for great accomplishments elsewhere, in Wall Street it almost invariably leads to disaster.”
— Benjamin Graham, The Intelligent Investor
Historically, the ownership of businesses has been one of the best ways to accumulate and to preserve wealth.
For the typical portfolio investor, the most practical way to acquire business ownership is to purchase shares of common stock. Centuries of experience and volumes of research have conclusively shown that owning equities has been one of the most effective ways to protect the value of capital over long periods of time.
The basic problem facing all stock investors is to identify attractive investment opportunities from among all business interests available for purchase. At Centre Street, we approach this problem by confining our commitments to situations that we understand, feel are reasonably priced, and which offer promise of good results at prudent levels of risk. We employ time-tested principles of securities analysis, implemented by rigorous research practice, common sense, and the critical judgement developed over years of experience in the capital markets.
We are long term investors. We are decidedly not “market timers.” In fact, our stance vis-à-vis the stock markets is neutral. We view the markets simply as mechanisms for buying and selling businesses. Our interest in the trend of market prices is only marginal; however, we have a great deal of respect for the average valuation levels of stocks.
In reviewing potential stock acquisitions, we emulate the prudent businessperson interested in purchasing a company. The most important question we ask about any stock is, therefore: “How much is the business worth?”
Centre Street takes great care to properly assess the value of companies before committing funds to purchase shares. We will buy a stock only after we understand the company’s business and are convinced the price is attractive.
Admittedly, business valuation is an imprecise science, tinged with art. Nonetheless, long experience has shown that the value of companies can be determined with some degree of confidence, by use of generally accepted economic and financial principles, combined with reasonable assumptions regarding prospects and other inputs. Properly performed, such analysis can yield reasonable benchmarks for judging the market price of shares.
Contrast this approach to that employed by those stock market participants whose interest lies solely in the question “Will the price of the stock go up?”, regardless of what the current price might be in relation to underlying value. There are many reasons for short term fluctuations in stock prices, and such stock traders can and do make money for their clients. However, we take a rather dim view of such practices. We believe that, over the long haul, the risks involved in that approach far outweigh the potential rewards to be gained. We prefer to base our research and investment decisions on the time-honored concept that every purchase should deliver real and demonstrable value for the dollar.
Fortunately for investors, the public stock markets are occasionally very short sighted. Driven by emotion and irrational concerns, the markets will sometimes price businesses well below their inherent values, as measured by any dispassionate, long term perspective. Such phenomena tend to create opportunities to purchase stocks at reasonable cost. Centre Street focuses on finding and taking advantage of such opportunities.
In our view, good investment ideas are relatively rare most of the time, and finding them requires hard work. Hence, our operations are heavily oriented towards fundamental research. Since our clients pay us to make investment decisions, we strive to develop opinions independent of the investment community consensus, and we avoid getting on bandwagons. So, although we use the work of outside analysts and services, we rely heavily on original corporate reports and on discussions with company executives as sources of information upon which to base our conclusions.
Investment and Speculation
The remarks quoted below suggest to us that the general public (as well as many Wall Street professionals) often confuses investment with speculation.
“Nervous investors decided against big bets, resulting in the lowest market volume in three months.”,
—Wall Street Journal, May 17, 1994
“Investors, afraid of both inflation and the Federal Reserve, scurried for cover yesterday, sending bond yields up ... and stock prices tumbling.”
—New York Times, May 7, 1994
“Tokyo: Stocks rose for the third straight session yesterday on a last-minute rally powered by investors seeking to bolster the value of their Nikkei 225 index options.”
—Investor’s Business Daily, April 8, 1994
“[M]any investors ... now feel that the faith they showed in the market has been betrayed.”
—New York Times, October 20, 1987
Investment involves the commitment of funds to situations which, after careful study, offer the hope of worthwhile results at reasonable levels of risk. By contrast, speculation entails the purchase of an asset based solely on one’s notion as to how its price will change, usually over a short period of time.
At Centre Street, we believe the term “speculative securities” is an oxymoron. Because we continually remind ourselves that we are responsible for managing other people’s money, we restrict our attention to assets that meet our investment criteria, and leave speculation to others.
Fixed Income Investments
By and large we view fixed income securities as mediocre investments relative to common stocks. The historical long term returns afforded by bonds amply support this view. Nonetheless, fixed income investments, such as bonds and preferred stocks, may be appropriate under certain circumstances:
- They may be used temporarily when suitable equity investments aren’t available.
- The particular circumstances of certain investors may require some assets to be converted into a source of income with less market volatility than that of stocks.
- Occasionally, an exception to our general view may occur when a bond, like a stock, becomes priced so attractively as to offer the potential for unusual gain.
Our approach is one of expediency. We make no attempt to predict interest rates. Rather we employ a laddered maturity structure to position our clients’ fixed income portfolios to take advantage of changes in rates over time. This simple strategy, combined with an emphasis on high quality issues and low turnover, permits our clients to meet their income objectives with minimal risk and low cost.
“Private” Investment Counsel
Our focus on the investment needs of private individuals aside, the word “private” is vital to our investment philosophy.
One of the investment world’s most potent myths is that the individual investor is helpless against the giant financial institutions and impersonal economic forces that rule the capital markets. In reality, however, nothing could be further from the truth. It is the individual, not the institution, that really has the upper hand on Wall Street.
Institutional investors are often driven by various factors other than the client’s best interests. Intense scrutiny and severe competition encourage short term thinking, imprudent risk taking, an emphasis on image over substance, and an unwillingness to offend corporate management. Improper incentives and bureaucratic delay prevent the adoption of effective investment strategies. The sheer size of some firms often adversely affects the implementation of what strategies do emerge.
The private, anonymous, knowledgeable individual actually holds a very significant advantage over such organizations. We believe quite frankly that privacy is an extremely valuable commodity in the investment world. Good investment ideas are difficult to obtain, tend to have a limited shelf life, and must be exploited promptly, before competition drives up prices. Almost by definition, the private individual, who thinks independently and acts nimbly, can exploit investment opportunities much more effectively than any large organization.
The cornerstone of Centre Street’s philosophy is to conduct our investment operations in the manner of such a knowledgeable, private individual.