Value Investing
Benjamin Graham, founder of value investing, observed that, in the short term, stock market participants frequently react irrationally to good and bad news, paying too high a price for stocks during periods of excess optimism, and then selling at a loss during periods of excess pessimism. This emotional buying and selling causes wide fluctuations in market price. It is these fluctuations that afford opportunities for the discerning, value-oriented investor to buy wisely when prices are low and to sell wisely when prices are high. Therefore, the time of maximum pessimism is the best time to buy – you get a bargain through buying quality stocks when most people are selling them. As a necessary corollary, if one must or should sell, the best time to sell is the time of maximum optimism.
Margin of Safety
We embrace Benjamin Graham’s central concept of a “margin of safety” to minimize stock market risk. The existence of a margin of safety is dependent on the price paid for an investment in relation to its intrinsic value. The lower the price paid in relation to intrinsic value, the greater the margin of safety.
Diversification
Investments in equities should be diversified to reduce risk. In a portfolio which includes a number of good quality companies, the positive results achieved by most are likely to more than offset any disappointment in the others. However, if diversification is carried too far, it reduces or eliminates the possibility of achieving superior returns in common stocks. Excessive diversification is one of the principal reasons why many mutual funds fail to provide superior returns over the long term. Therefore, we diversify enough to protect capital, but not so much as to make it impossible to achieve superior returns.
Balanced Investing
CVM portfolio management provides an appropriate balance between the goals of high return and safety of principal. In a balanced portfolio an investor’s assets are divided among the three principal asset classes of marketable securities: stocks, bonds, and cash equivalents.
A typical balanced portfolio shares in the long-term gains of the stock market through its holdings of common stocks, while its holdings of bonds and cash equivalents moderate the effects of stock market volatility and significantly reduce shorter-term risk.
Asset Allocation
Asset allocation is the process of deciding the percentage of an investment portfolio to be held in the three principal asset classes – stocks, bonds, and cash. We use asset allocation to emphasize the classes of investments which we believe present the best value at any given time, that is, the most reward and the least risk
Buy and Hold
Once we have purchased at a bargain price we tend to hold through subsequent fluctuations. Holding on to the shares of a high-quality company over the long term maximizes returns while minimizing taxes. We sell only when a company’s long-term prospects have deteriorated significantly, or the price is so high that it already anticipates and discounts the likely advances of the long-term future.
Tax Management
Minimizing taxes is an important part of investing. What counts is the total return to the investor after deducting costs and taxes. In taxable accounts we minimize taxes in several ways. Our portfolio turnover is low. We typically realize lower-taxed long-term gains, rather than higher-taxed short-term trading profits. Tax-efficient management is something no mutual fund can ever supply because: (1) a fund manager cannot possibly take into account the tax position of the individual shareholders; and (2) the tax laws governing mutual funds effectively preclude efficient tax management for the shareholders.
