We have an absolute valuation process, with buy and sell prices for every stock in our portfolio. We think in terms of cap rate, a real estate term, which we calculate by dividing our estimate of a company's normalized operating earnings by its enterprise value. We're trying to buy companies at a 15 percent earnings [...]
During difficult periods we have always been willing to add risk as the rest of the market is removing it by reducing valuations. I remember sitting in my office on October 19, 1987, when the market was crashing and getting a call from [Royce & Associates founder] Chuck Royce who was one of my brokerage [...]
Small-cap stocks by definition are more fragile, more likely to have one dominant product or one key executive or one big customer. Strange things happen, so you have to diversify no matter how much you may love individual names. When something strange happens in one of Johnson & Johnson's or GE's businesses, it's a rounding [...]
We have in the past hired smart young analysts right out of business school, but have concluded that's not for us. We're looking for people who have been around long enough to know who they are as investors and the type of environment in which they do their best work they're not still trying different [...]
One key benefit of experience is that we've heard it all from management teams over the years and have developed a pretty refined sense of what's important and what to look for. We want to hear from management why the company has historically been successful and how in the current competitive environment they expect it [...]
We evaluate businesses over a full business cycle and probably our biggest advantage is an ability to buy things when most people can’t because the short-term outlook is lousy or very hard to judge. It’s a good deal easier to know what’s likely to happen than to know precisely when it’s going to happen.
The traditional reason for looking at a small-cap stock, which is less liquid, less known, and therefore theoretically riskier, is because it can grow faster. What happens as a result is that people crowd into the same 200 names that are rock-star growers, leaving aside a large number of smaller companies that may still have [...]