PROCESS

What distinguishes us from other investment managers is our unique four-part investment process, which integrates a rigorous qualitative assessment of a company’s character and competencies into a traditional financial analysis framework.  Our investment process examines a company and its stock from four independent perspectives:  

	Fundamental Analysis
	Quality Analysis
	Valuation Analysis
	Portfolio Construction

Our investment process begins with traditional fundamental analysis including:

Revenue Growth – because margins cannot expand forever, we seek companies that are in vibrantly growing businesses.

Earnings Growth – because earnings drive stock prices over time, we seek companies with sustainable, superior rates of earnings per share growth. After all, P/E ratios cannot expand forever, so if stock prices are to rise, earnings must grow.

Earnings Stability – because investors hate surprises, predictability matters. One measure of reliability is the stability of a company’s earnings around its trend line.

Profitability – because profits fund future growth and represent the return to shareholders, the level and trend of a company’s profitability is a key indicator to us of its leadership position in its industry.

Balance sheet strength – because we are investing in the future growth of a company, we need to ascertain whether its balance sheet will support the rates of growth we are projecting.  

Companies that pass our fundamental hurdle become candidates for our Quality analysis.  

While character may not be able to be measured in a strictly scientific sense, it can be observed, evaluated and assessed.  When we assess an organization, we are concerned with both who they are (Character) and what they do (Competencies).  We are interested in companies whose relative strength in Character and Competencies will likely lead to their success over the competition.  

 Large, modern corporations are complex, dynamic systems, and thus vulnerable to imbalances leading to instability.  As long-term investors, we are interested in companies who can dynamically balance the often opposing yet equally important forces constantly at work within an organization.   

We use all available sources of information (annual reports, press releases, analyst reports, conferences, articles, management meetings, the Internet) to assess a company’s corporate culture, building a “map” using a proprietary methodology.  Based upon the Leadership Diamond™, a conceptual model of Greatness created by philosopher Peter Koestenbaum, the assessment tools and methodologies have been developed, refined and put into practice with many major corporations around the world over the past decade.  We search for either the “seeds of greatness” or the “seeds of destruction” buried within a company, leading us either to buy or avoid the stock.  

Once a company has passed both the hurdles set by our fundamental and quality analyses, we analyze the stock’s appreciation potential.  

Because the standards set by the first two steps of our investment process are so stringent, we end up focusing our efforts on a very select group of companies, and over time we have developed an understanding of where their stocks tend to trade relative to their peers and their own history.  

Since the stock market is a giant discounting mechanism, bringing a stream of future earnings back to the present and assigning a value to it, it is vitally important how quickly those earnings are growing. Thus, the relationship between the Price/Earnings ratio and the long-term earnings Growth rate, often called the PEG ratio, is the key measure we use for most of our stocks to determine their relative attractiveness at any particular moment in time.  

If a stock passes all three of our stock-picking screens – fundamental, quality, valuation – it becomes a candidate for inclusion in the Diamond Portfolio.  

The Diamond Portfolio strives for greatness, growth and balance.  

Thus far, our stock-picking screens have kept us focused on stocks exhibiting potential for long-term growth, industry leadership and price appreciation. Our portfolio construction disciplines are intended to preserve balance in the portfolio, helping it to resist the shocks that are inherent to equity investing.  

The Diamond Portfolio attempts to remain both highly focused in stocks that we believe exhibit superior potential and broadly diversified to limit over-exposure to any one sector of the market. Thus, the Diamond Portfolio typically is invested in 30 stocks diversified across 6 broad economic sectors: Technology, Healthcare, Services, Consumer, Regulated and Industrial.  

The Diamond Portfolio attempts to remain fully invested at all times in order to optimize long-term growth and to avoid unintended market-timing errors, a large source of underperformance for many investment managers.  

The Leadership Diamond® is a registered trademark of Peter Koestenbaum, Ph.D.