Stacey Muirhead Captial Management

INVESTMENT PHILOSOPHY

Long Term Investments

In accumulating our long term investments we are guided by the following criteria:

  • Does it possess outstanding business economics?
    We look for businesses that have a sustainable competitive advantage. Over time we have found that excellent businesses will demonstrate many of the following attributes:
    • High returns on shareholders' equity 
    • A strong balance sheet with minimal or no debt
    • Attractive operating and profit margins
    • Dominant position in its industry
    • Significant brand recognition
    • Pricing power for its products
    • Growing revenues and earnings over time
    • Consistent free cash flow generation
  • Does it have honest and capable management?
    Making judgments about the integrity and ability of people is an important and vital component in our approach. We want to align ourselves with principled managers of proven ability who think and act like owners. We have found over time that it pays to invest in companies where the managers have made a significant investment in the company with their own capital on the same basis as us. We look for reasonable compensation practices and managers who are effective at allocating excess capital. We also look for managements that are successful at creating unique purpose driven, performance focused cultures at their companies.
  • Can it be purchased at an attractive price?
    The price you pay matters. Even the world's greatest business is not a good investment if you pay too much. An attractive purchase price creates a margin of safety if a business encounters unexpected difficulty. In theory, the precise value of any business is equal to the net present value of all the cash it will generate for its owners over time. In practice, this value is difficult to calculate with any precision. When making judgments about what price we can pay for a long term investment, we consider the ratio of price to earnings and price to free cash flow. We also compare the earnings yield of a company to that available from investment alternatives such as risk free government or high quality corporate bonds.

In summary, we are looking for a great business, run by great people, that is available at a great price. To be a great business, a company must meet the needs of all its stakeholders including its employees, customers, the communities in which operates as well as its shareholders. We want to be partnered with companies that embrace diversity, inclusiveness, and equality of opportunity; that are good environmental stewards; that act ethically and legally; and that demonstrate appropriate corporate governance. We actively consider these criteria in addition to economic, management and valuation considerations when making long term investment allocations.

We also recognize that a key component to long term investment success is knowing when to sell opportunistically. While we agree with Warren Buffett when he says that his favourite holding period is forever, we understand that there are times when it may be appropriate to sell a long term investment position to maximize our returns. We will normally dispose of a long term investment in the following circumstances:

  • When we deem the market price to be more than its underlying intrinsic value.
  • If we see evidence of factors that are likely to significantly lessen its sustainable competitive advantage.
  • Where we believe that we have been intentionally deceived by company management either through their comments or in the financial statements or other shareholder communications.
  • In circumstances where we have an alternative investment opportunity that we judge to be better than an investment holding we already own and where we do not have excess capital available for deployment.

“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten or twenty years from now. Over time you will only find a few of those companies…so buy a meaningful amount of the stock.”

Warren Buffett

 

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