September 9, 1999
In managing your account, we would keep close contact on the following items:
A. We will advise you as to our investment philosophies. After you understood our philosophies (which by the way, are quite simple and logical), we will determine your personal risk parameters.
B. We will set up various investments that will be geared toward all the issues discussed. We will make sure that the investments were consistent with your current and future cash flow needs.
The rest of this letter will emphasize our views as to why you should consider us as a prudent and worthwhile investment manager.
We have been a student of investments since 1977. I pride myself as a value investor, with our greatest concentration of studies and discipline coming from Benjamin Graham and Warren Buffett.
We are in constant touch with well-known market professionals and we share and learn from one anothers ideas. This is an excellent form of research as we can always play “devils advocate” with either their research or ours. You will notice that a recurring theme in our portfolio management, is the exercise of doubt.
We are technologically proficient and most certainly study and have ideas of what the world will be like during the next five years as well as further into the future. Yet we keep a keen eye on valuations and understand that technology alone will not precipitate higher equity prices in the future.
Although we are value investors, we have made large profits on nontraditional businesses. For example, we were early buyers and holders of Amazon.com, @Home, Comcast and Telecommunications, Inc. In each of these companies, we had the foresight to project huge growth even though the investment industry criticized the companies “outlandish valuations”
The following are a few examples of our investment philosophy:
A. I will borrow a quote from Warren Buffett. “The hopeful holding period of any of our stock investments is forever.” Please keep in mind that we diligently study each company we own and will sell it if we foresee permanent market conditions changing or if our reasons for originally buying the company no longer exists.
B. We are always looking for new and innovative investment ideas.
C. We like to find companies that are trading at reasonable levels to future cash flows, earnings and growth rates. For example, we were early buyers of Home Depot, even when Wall Street criticized their lofty multiples. I have no problem paying forty times earnings when a company is growing (or projected to grow) at an annual rate of 40%. On the other hand, we find it fundamentally unsound to invest in a company at lofty levels when their future growth rate is substantially less than their earnings and cash flow rates.
D. We should also mention that we have studied Peter Lynch for many years. We learned from him to use our logic and families in helping us find good companies just as Peter Lynch found. My family has also been enormous contributors in helping me find companies to research.
E. We focus our portfolios on a select number of companies. We currently have about fifteen companies in our common stock portfolios. We do not want to own more companies than those on which we can remain totally informed. Warren Buffett only has about ten core holdings in the Berkshire Hathaway portfolio.
If you would like us to elaborate on any of these ideas or discuss anything, please just let us know.