Money Management Services
- How is our Persistent Growth Investingsm style different?
Persistent Growth Investingsm methodolgy produces ideas for your portfolio management strategy that we believe can remain there for years. We choose to be long-term owners, because we are confident we have done our research thoroughly and are well positioned to respond to the twists and turns that inevitably occur in stock investing. We believe owning high quality growth stocks bought at reasonable prices can bring you wealth management benefits by transferring the high return on capital enjoyed by such companies into appreciation over time. Once the market recognizes that growth is indeed lasting in one of your holdings, improved valuation can act as a second lever of appreciation. If you are a pension plan sponsor, endowment or foundation, the longer the time horizon you have, the more likely it will be that the return on investment you achieve through effective portfolio management coincides with the high returns we think the enterprises you own can realize. Individual investors get an added benefit of substantially reduced exposure to capital gains taxation.
- What should I look for in a money manager?
Money management is inherently a difficult business prone to mediocrity. Many studies have proven that over long periods of time it is nearly impossible to beat the returns earned by merely investing in stock market indices; in other words, the stock market is efficient because it embeds all available knowledge into pricing. However, during comparatively short periods of time (up to three years) the emergence of investing themes (the Internet, energy, small cap value, hedged portfolios, etc.) creates “winners” that feed the marketing pipelines of large financial conglomerates and even specialized wealth management firms. Often these are culled from the survivors of investment management products originally seeded in multiplicity, a phenomenon known as “survivorship bias.” Wealth managers regularly fire poorly performing portfolio management professionals, and they always look to bring on board investment management firms with appealing track records, so you as a prospective client will always think the current menu looks appetizing whereas past clients know better.
The solution to this problem in our opinion is for you to diligently seek money management firms that have performed well in stock investing for long periods of time that span a variety of market conditions: growth, value, expansion, recession. Avoid organizations with pipelines needing to be fed at all times.
- How is Gaineswood different?
Gaineswood is not a cog in the wheel of a large financial conglomerate. Our only business is investment management, and our affiliate (GARP Research & Securities Co.) produces stock investing research for institutional investors. These two activities live or die based upon portfolio management performance and little else. We have an audited 10-year track record generated during times both good and bad for our portfolio management investment style. We have not phased out or merged portfolio products to artificially enhance our investment management performance.
- What sectors generally fit your criteria?
Since growth is one of our mainstays, your portfolio management strategy generally is weighted heavily in the medical, technology, and business services sectors. However, we are valuation sensitive and wary of having large commitments here when others are ebullient. We are not averse to enriching our stock investing choices with great companies in mundane fields such as agriculture, industry, the consumer sector, or financial services. Often gems can be found in these areas, and valuations are not always reflective of potential. In the past we have included in our portfolio management solutions companies dealing in cotton planting seed, real estate brokering, and industrial equipment auctioning.
- What sectors don’t fit your criteria?
Our primary measure of quality for stock investing is return on capital employed. This being the case, industries that are extremely capital intensive or that have thin gross margins (without some offset) are to be avoided. Thus, we have historically avoided including energy producers, heavy manufacturing, automakers and the like in our portfolio management strategies.
- How do you find new ideas for your portfolio management strategies?
We employ a variety of approaches because our portfolio management philosophy is multifaceted. We manually screen multi-year chart patterns for evidence of basing. We examine valuation of potential stock investing targets carefully, and measure it differently than our competitors tend to do. We closely examine whole industries and adjacent markets, which can turn up interesting niche players that can’t be neatly categorized. From this pipeline, we make on-site visits to companies and their competitors, and we regularly attend trade shows to forge links with privately held rivals.
- Do you use outside research to make investment management decisions?
Rarely if ever. We subscribe to services that survey a wide variety of research and news providers useful for stock investing, because it can help us understand the tone of trading. We prefer to scour the Internet, trade magazines, and other sources of published materials for less obvious gems that can improve our portfolio management performance. Our affiliate, GARP Research & Securities Co. (and Gaineswood Investment Management, Inc. as its predecessor), has published proprietary research consumed by institutional money management professionals for over a decade.
- How do you assess quality?
In the end what matters to you in portfolio management is whether a company you own earns a high return on capital over many years. If quality doesn’t express itself financially, then you as an investor get caught up in the game of outguessing how others will perceive excellence, even when it may not be there at all. Another facet to quality is the ability of a firm to gain market share from rivals, and whether it can do so at comparable or greater levels of profitability. This is a rare find in stock investing, and something we strive for in your portfolio management.
- How do you reduce risk?
Sometimes greed motivates investors, other times fear. Stock investing is inherently risky. By popular demand in the aftermath of the bubble an entire industry has been built upon risk aversion. First came hedge funds, next portable alpha. Gaineswood offers concentrated and diversified portfolio management strategies that are “long only,” and even in a long/short account we maintain a long bias. While this exposes you to stock market risk (beta), we attempt to minimize market-associated volatility through the selection of high quality firms with attractive return on capital characteristics and competitive advantages. In the very short-term of stock investing, we have noticed that market downdrafts can effect mid-cap and small-cap stocks disproportionately, but in certain environments the opposite may even happen. We attempt to identify companies whose business proposition has some durability and potential to outgrow competition, so in the long-term risk might be reduced through such strategic stock investing and wealth produced for you.
We urge you to closely examine our investment management performance metrics and those of other money managers. Other money management practitioners may have you key in on the wholesale removal of risk that is a feature of hedged and portable alpha portfolios. However, bear in mind this may come with a price: lessened appreciation (because beta has been extracted) and other unknown risks inherent in executing complex strategies (hedge fund melt downs). Instead, consider the big picture of investment management. Our goal is to have gains in your portfolio management holdings correlate well with those earned by more volatile growth indices such as the NASDAQ, while having downside movement bear a closer relation to more conservative growth indices. Your portfolio management financial planner can help you decide what amount and type of stock investing risk is appropriate for you, and we would be glad to share with him the statistical characteristics of our portfolios.
- Is Gaineswood an activist investor?
No. Having your portfolio management account invested in a company for many years often provides us with repeated access to its senior management. However, by design we only want to be involved in situations where management already has made a commitment to achieve substantial growth in a highly profitable manner, and it has the resources to do so. Because we initially get involved under contrarian circumstances, sometimes we rub shoulders with activist investors, who are almost never present several years later if one of your holdings has appreciated considerably.
Since your stock investing purchases only occur when we project persistent, significant earnings growth, we usually oppose the financial engineering of “quick fixes” designed to “unlock shareholder value.” The principal reason is that the upside from a takeover or restructuring is usually well short of the rate of return we anticipate through our investment horizon. Moreover, if a company is left intact, such fixes usually come with a cost of impairing growth initiatives. We admit we usually feel strange uniting with management against a Greek chorus of Wall Street operators calling to levitate its stock, but with many years of experience in these situations, we are secure in our investment management methodology and even think such episodes can inject a sense of urgency into management’s mission.
Still, we don’t want to let our commonality with management’s purpose restrict our stock investing view through rose-colored glasses. We believe our thorough, comparative investment management approach subverts bias, for it demands that we delve into all aspects of an industry and seek out critics, whereas it is human nature for a management to act like a newspaper editor and permit only a point of view that flatters its own cause to surface. So we are always careful to independently substantiate that a company’s leadership indeed has a credible roadmap to achieve extraordinary performance; if it no longer does, we sell your position.
- How can your contrarian approach coexist with growth investment management?
We like to be contrarian when we initiate a position for your portfolio management account, because valuation is usually depressed, the trading flow is coming our way, and there is less risk of a stampede for the exits because expectations are modest. However, our focus on quality and growth sets us apart from others who rub against the grain of Wall Street, most of whom are investment management professionals with value investment strategies. Only through the passage of multiple years can it become evident that we have built a bridge from value to growth, so time becomes the glue that holds together these two seemingly incongruent elements of our portfolio management philosophy.
We believe that value investment management professionals generally err by selling too early, because there is usually not much tolerance for a wide range of valuation in stock investing, particularly when the denominator for this calculation is prospective 12-month earnings. As observers of stock investing know, stocks don’t ascend smoothly, they have fits and starts. “Disciplined” selling into ephemeral highs can look brilliant for a while, but it nearly always removes value managers from enjoying the favorable trends of companies destined for greatness. Yet, had they been oriented three or more years out and woven “quality” into the fabric of their portfolio investment strategy, they would truly have been able to profit from what in retrospect sometimes are proven to have been ridiculously undervalued situations.
What is value, truly? Is it buying Microsoft at four times long-term earnings and holding it until it trades at 40 times this divisor several years later when quality is certifiable? Is it the serial purchasing of mediocre franchises at 12 times EPS and blowing them out of the portfolio when their price-earnings ratios touch 15? (This method could trigger taxation several times over the same time span.) Why do most value investment management professionals stockade themselves inside the latter intellectual territory?
Our analysis of long-term technical trading patterns shows us that stocks emerging from bases climb a wall of worry, a metamorphosis that eventually gives birth to a shareholder membership that is fully cognizant of a company’s persistent growth capability. While a stock begins to base out, it leaves behind an era when expectations are not being met, and enters another in which fundamental stability and low growth conspire to bore investors. If growth is improving but technical trading patterns keep a ceiling over the stock price, we often discover the majority of analysts remain hung-up on issues whose importance has dissipated. If we do our investment management job properly, those who eventually traffic in your holdings will be growth investors, a group more concerned with fundamental momentum than valuation. This situation gives rise to the potential for parabolic trading patterns in stock investing, which in ideal conditions provides an opportunity for us to exit at very appealing prices. In our opinion, the Achilles’ heel of the growth community is its propensity to fall under a spell of good tidings, blinding it from potential harmful competitive developments or hints of end-market saturation. We aim to marry the best of both portfolio management approaches and generate pleasing performance, regardless which strategy is favored in the equity market.
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Gaineswood Investment Management, Inc - Persistent Growth Investingsm
406 Main Street, Reisterstown, MD 21136
Ph: (410) 764-3500 Fx:(410) 318-5048
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