The Pulitzer Prize winning author and historian Samuel Eliot Morison said, “we ought to read history because it will help us behave better.” No other reflection about the virtue of understanding our roots could be truer than this. Not only do we have to know where we have been to understand where we are, but knowing history can help us make better choices about how we want to get where we want to go. It’s common and easy to apply this principle to government, politics and law, but it is also true in economics.
Though the soup du jour on the investment menu for the past twenty years has been index investing, an investing principle at work for more than a century is that of owning quality business and buying them at reasonable values. This is the strategy that made Warren Buffett and Benjamin Graham, his predecessor and teacher, famous. It is the strategy that has benefitted investors for generations, helping them grow and preserve their wealth. It is also the strategy we use at Circa Capital.
The version of the quality-value approach we use in our Core strategy has few moving parts. We buy companies we feel have a sustainable competitive advantage—companies that are the best or only businesses that do what they do. We buy these companies when we believe they represent a compelling value. And we start each company with the same weight. This keeps us from playing favorites; after all, if the company meets our exacting standards, it deserves to have a fair weight. We also balance the portfolio across sectors and industries because we want our portfolio to be driven by the same forces as the US economy. Over many years, this approach has delivered predictable results, which is what most investors appreciate.
Not everyone thinks about quality and value in the same way. Some appreciate companies with more growth potential. Others prefer bellwether companies with more stable forecasts. We like to think our Core strategy offers a good blend of both; a mix of companies likely to profit in any economic environment and others that are disrupting industries with new technologies, products, or services. Still, for those investors who prefer one tone over the other—more growth, more value or more income—we also offer strategies that are more specific.
Our Growth strategy emphasizes companies that are expected to continue to grow well within their respective industries. Naturally, there is an emphasis on certain sectors like technology and demonstrated growth companies like Amazon, Google, and Microsoft with a strategy like this.
Our Value strategy emphasizes companies that are well-versed at generating stable cash flows in a variety of economic environments. This also leads to an emphasis in certain sectors like energy and financial services, and companies like Chevron, Berkshire Hathaway, Johnson & Johnson, and Walmart.
Our Global Dividend strategy is for investors who are comfortable investing a greater balance of their portfolio in foreign companies, knowing that all the companies are likely to generate stable cash flows to pay a consistent and hopefully growing dividend. Many companies like Novartis, Siemens, and Barclays operate in traditional, dividend-paying industries, and are represented in a portfolio like this.
Just like our Core strategy, in our Growth, Value, and Global Dividend strategies, balance is key. This comes in stark contrast to many of the most popular index products. Many broad market portfolios have upwards of 20% invested in just four companies—Apple, Amazon, Google, and Microsoft. Growth-tilted portfolios often have over 40% invested in those same companies. These funds are largely driven by the fortunes of these four companies. Certainly, these businesses are exceptional, but so are Costco, Ecolab, Amgen and a host of other companies that have earned a place in a portfolio of high-quality businesses, and not as the footstool of Big Tech.
We don’t buy companies just because they are participants in a popular theme, or companies that are cheap for good reason. Momentum and deep value strategies like these are popular among some investors. Chasing after fast moving stocks or emerging industries, hoping to ride the wave up, or buying companies on the verge of collapse, hoping they can rebound, can make an investor a fortune. But investors have lost fortunes also, being on the wrong side of those trades. They are more like gambling than investing and carry too much risk for most investors. That’s not our style. We like knowing that the companies we own have been through tough periods and are stronger because of it. And our clients like knowing what they own and why they own it. Just like we know that riding a bicycle down a flight of stairs is a bad idea, we don’t have to be bandwagon investors in risky investments to know the same.
To give you more insight into our strategies and what an investor might expect from each, we are producing a series of short informational videos. You can look forward to seeing these in your inbox over the next few months.