$ Money Management
$ Comprehensive Financial Planning
My philosophy is that we buy businesses, not stocks. We look for long-term fundamentals that outweigh short-term worries on the Street. We have long-term horizons and enormous patience. We look for companies trading at a discount to free cash flow, book value and intrinsic value, and we have a basic fundamental belief that all under-valuations will eventually correct.
Our criteria for investment is that we look for strong granchises that have freedom to price; strong, experienced management that’s owner-oriented; businesses trading within 30% of tangible book value; and we’re looking for a 10% return on equity for every dollar of book value purchased. As an example, if a company was trading at 2 times book, we’re looking for a 20% return on equity. We look for an earnings growth rate for the past three years and projected forward that is in excess to the current price/earning ratio, known as the PEG. We look for a dividend of at least 100 basis points over the current rate of inflation. We look for a current ratio, current assets compared to current liablilities, of at least 2. We look for a quick ratio, current assets minus inventory compared to current liablitities, of at least 1.
We like enough cash in working capital to cover payables and short-term debt. We look for long-term debt that is less than 50% of net worth. Most importantly, we look for companies that have a stated mission to generate shareholder value. That means expansion accretive to earnings, dividend increases, and share buybacks. And our dream investments are companies trading for less than net working capital – that’s current assets, minus current liabilities, minus long-term debt – that have operating cash flow.