The SBI Portfolio

The conclusion of nearly all academic studies in recent years is that "value" stocks outperform the broad market averages, and do so with less risk than other kinds of stocks. Clearly there are periods when stocks with lower Price/Earnings ratios, higher yields, and lower Price/Book ratios than the broad market don’t outperform, but no other approach appears to offer more consistent excess performance nor better risk-adjusted returns. In our past work with utilities we have found high quality and high financial strength combined with moderate growth and rising dividends can lead to consistent excess performance. Our research and real-time management has shown that this insight is equally valid across the broad market. The SBI Portfolio embodies the principles detailed in Lowell Miller’s book, The Single Best Investment (AdamsMedia, 1999).

Investment Philosophy:

Equities with above average yields and rising dividends have consistently displayed excess performance relative to broad market indices over many time periods. Dividend growth is seen as the best signal from management regarding future prospects of a company---information that is more reliable than any brokerage analyst or market pundit’s opinion. Over time, increases in dividends induce increases in the price of the equity producing those dividends.

Investment Objective:

The SBI objective is to provide investors with a relatively conservative path to participate in the broad growth of equities that we anticipate to be as true in the future as it has been in the past. The goal of the strategy is to outperform a reasonably broad measure of the equity market, such as the Value Line Index or the Mid-Cap fund average. Safety during market declines is a key focus of the strategy, since risk control during declines is an extremely important ingredient of long-term success.

Investment Strategy:

The core holdings of the SBI Portfolio are moderate, reliable companies that serve a proven market and have demonstrated success in their business. We always take the position that we are long-term investors in an ongoing business with an established marketplace and a history of sound management. We seek a history of dividend growth as evidence that growth is "real," and that management is willing to share the fruits of prosperity with investors. Companies are screened for excellent financial strength---including low debt relative to their industry, among other balance sheet items---and conservative accounting practices. A premium is placed on reliability and certainty of future company success, rather than on its magnitude.

Typically, core holdings will aggregate to a higher than average dividend yield, and above average dividend growth, considering both past growth and future projected growth. Attractive holdings have some protection against competition through market dominance, branding, geography, or intellectual property. Growth of cash is seen as a demonstration of "real" earnings, though of course there comes a time when sound management means investing excess cash in business expansion. Generally, we purchase stocks with the conviction that they may be held for decades.

In addition to core holdings, we often purchase sound companies that may have experienced temporary problems---either in their basic business or merely in the price of their stocks. A company that "misses" its earnings targets due to overly rapid expansion, for example, may become quite a bargain in the market due to investor disenchantment, while the basic business may remain substantial and sound. A temporary slowdown is often severely oversold in the market, creating fine opportunities when the pricing has become more realistic. On occasion, we may hold stocks with little or no dividend, when they offer extraordinary prospects. These "special situations" become apparent to us as a result of our general market expertise, and may be considered trading opportunities as well as long-term holdings. They never constitute more than a small minority of the portfolio holdings.

Generally, average positions are 3-5% of the portfolio, but may vary according to market conditions. Holdings are continually re-evaluated for fundamental health, and new stocks replace existing holdings when "candidates" show sufficient improvement or price attractiveness. Core issues are sold when companies fail to raise dividends, when prices increase to a point of overvaluation, or when the basic value premise that inspired purchase is no longer present. The portfolio is normally fully invested, but may carry cash from time to time if there are too few stocks that meet our criteria in a particular period.