Stacey Muirhead Captial Management


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 most or all 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 also look for reasonable compensation practices and managers who are effective at allocating excess capital.
  • 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 in the event that a business encounters unexpected difficulties. 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 nearly impossible to calculate with any certainty. In 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. We strive to be disciplined in the application of our stated investment criteria to all purchase decisions. 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 some or all of an investment holding in order to maximize our returns.

We will normally dispose of an investment holding in the following circumstances:

  • When we deem the market price to be in excess of 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.
  • 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 have no 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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