Investment
Strategy
Focused
and Flexible
While
we focus on long term trends, our investment strategy is fully flexible.
We are not limited to only stocks. Due to the nature of investment
cycles, assets other than stocks may be preferable. Our flexibility
includes stocks, bonds, hard assets, mutual funds and cash.
We
may use various strategies within the same portfolio. We do not
believe money managers should limit themselves to only a single
strategy. Some years value outperforms, some years growth outperforms.
There are parts of the cycle that require a buy and hold strategy
while other parts of the cycle require the manager be more nimble
and be willing to trade more actively. Below are some of the basics
to our strategy:
Long
Term Cycles, Mega-trend - Understanding the long
term trend is the foundation for a successful investment plan. It
helps an investor stay focused. From 1982 through 1999 stocks and
bonds were both in a mega-trend, they were in the bull market part
of the cycle. It was a huge long-term cycle. It was not without
its interruptions though. The declines in 1987, 1990 and 1994 didn’t
end the trend. They were just corrections within an up trend.
It
is the same today. Certain mega-trends have developed that we at
Cornerstone believe could be with us for years, if not decades to
come. It is these trends that form the foundation for our investment
portfolios.
Fully
Flexible Asset Allocation - We will shift our asset
allocation according to what the market and economy present. We
do not adhere to a predefined investment style. We let the market
action and long-term cycles determine what will work. For example
- it doesn’t make sense to own bonds during an inflationary
period or own growth stocks during a bear market. This gives us
an advantage over those that do adhere to strictly defined investment
styles and thereby under-perform when the market isn’t going
their way.
Fundamentals Matter - Hopefully,
the past few years have taught everyone that fundamentals do matter.
We look for stocks that are industry leaders, turnaround candidates
or have something unique about them. We do not follow fad stocks
or the hot issue of the day. We do not buy IPOs.
First
we look at the industry, analyze it to determine if it is even something
that makes sense in the long run. We stayed away from internet stocks
because we could never figure out how a company could make money
giving away the product and the service. With so many competitors,
the prices for their products and potential profits kept dropping.
Great for consumers, lousy for investors.
Value
is ALL That Matters - A company may be fundamentally
sound but its stock is trading at 3 times its earnings growth rate.
We would pass on it. Just because a company is fundamentally sound
doesn’t mean the stock is a good investment. Stocks represent
the investors’ perception of the company. They do not always
represent what the company is actually doing. We look for p/e ratios
to be in line with (preferably well below) earnings growth. If they
are not, we don’t buy. History shows that the two numbers
usually come in line at some point in the cycle and that p/e’s
can actually go under earnings growth rates.
Willing
to Trade - Although we are strictly value oriented
for investments, we are not opposed to trading for profits. We have
employed some of the most sophisticated technical tools to give
us a read on stock chart trends. With these, we are able to nimbly
trade for profit certain stocks that we would normally not buy,
due to their extreme valuation. The secret to our success is the
sell strategy.
Sell
Strategy - What good is it if you buy the greatest
stock, watch it grow 200% and then watch the stock give it all back,
because you are tied to a buy and hold management style? With every
investment we make, whether it is a stock, bond or mutual fund,
we have a target and exit plan.
When
trading stocks it is especially important to have a sell strategy.
We go into each trade with a target in mind. Once a stock gets close
to the target, we re-evaluate and decide to hold or sell. We also
have an exit underneath the stock so that we limit losses.
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