INVESMENT LIFE CYCLE

Research Process:  Our research process takes place in-house. We rely on a number of different sources for idea generation, including proprietary computer screens and periodicals as well as other investors that we hold in high esteem. Once we have an idea that we want to investigate further we employ a consistent approach to determine if we want to commit capital to it.

Due Diligence:  The most common characteristic that our investment ideas share is that they tend to be inexpensive. Before we take a position in a security we want to know why it’s trading at a discount. Many times the reason is that the company has missed an earnings number or their growth rate has slowed down. At this stage, it’s our job to make sure that the reason the stock is cheap doesn’t have to do with a secular change in its outlook. In other words, we hope to avoid the “value trap”—something that is cheap but will stay that way because the business has changed.

Concentration:  We want to limit our number of portfolio holdings to between 20 and 25 of our best ideas. We think that by focusing our buying power in our highest conviction names we won’t dilute our returns, and it forces us to be discriminating in our purchases. In addition, despite what other advisors will tell you, we think that it’s much more realistic to be up-to-date on a portfolio of this size than on one that has 100 or more holdings.

Sell Discipline:  Once we have bought the security we hope to be long-term shareholders. However, that’s not always in our or our clients’ best interests. Below are four reasons we might sell a portfolio holding:

1. The company has realized its potential and is no longer undervalued.
2. We find a more attractive alternative.
3. The company’s competitive advantage has been permanently impaired.
4. We lose confidence in management.

Desired Turnover:  Like Warren Buffett, our preference is to find great companies and to hold on to them forever. We will pay special attention to portfolio turnover not just because of the disruptive force that change creates, but also because of the extremely significant differential between short-term capital gains tax and long-term capital gains tax. At ZIMCO, the saying “it’s not what you make, but what you get to keep” is not lost on us. As a result, we will go to great pains to avoid short-term capital gains in taxable accounts if possible in order to maximize our client’s after-tax performance.

Back to Top