A Closer Look at Cheviot Value Management
"Through all their vicissitudes and casualties, as earth-shaking as they were unforeseen, it remained true that sound investment principles produced generally sound results. We must act on the assumption that they will continue to do so."
Benjamin Graham
THE CHEVIOT VALUE MANAGEMENT APPROACH
CVM's goal is to maximize our clients' wealth and financial
security by investing to emphasize both capital appreciation and
the preservation of accumulated capital.
Capital Appreciation
We seek capital appreciation by means of disciplined, value-oriented investments in common stocks. Investment programs
consisting solely of fixed dollar and fixed income investments,
such as bank deposits, CDs, treasury bills, and bonds may preserve
capital, but will not produce capital appreciation.
Capital Preservation
We protect capital by means of portfolio management, including
asset allocation, diversification, avoiding inherently risky
securities, and by investing rather than speculating.
Balanced Investing
CVM portfolio management provides an appropriate balance between
the goals of high return and safety of principal. In a balanced
portfolio an investor's assets are divided among the three
principal asset classes of marketable securities: stocks, bonds,
and cash equivalents.
A typical balanced portfolio shares in the long-term gains of the
stock market through its holdings of common stocks, while its
holdings of bonds and cash equivalents moderate the effects of
stock market volatility and significantly reduce shorter-term risk.
Value Investing
Benjamin Graham, founder of value investing, observed that, in the
short term, stock market participants frequently react
irrationally to good and bad news, paying too high a price for
stocks during periods of excess optimism, and then selling at a
loss during periods of excess pessimism. This emotional buying and
selling causes wide fluctuations in market price. It is these
fluctuations that afford opportunities for the discerning, value-oriented investor to buy wisely when prices are low and to sell
wisely when prices are high. Therefore, the time of maximum
pessimism is the best time to buy - you get a bargain through
buying quality stocks when most people are selling them. As a
necessary corollary, if one must or should sell, the best time to
sell is the time of maximum optimism.
THE CHEVIOT VALUE MANAGEMENT DISCIPLINE
We observe scrupulously the first two rules of investment of one
of America's preeminent investors, Warren Buffett:
Rule #1: Don't lose money.
Rule #2: Don't forget Rule #1.
With these two rules in mind, our search for investment gains is
based on the following principles:
Margin of Safety
We embrace Benjamin Graham's central concept of a "margin of
safety" to minimize stock market risk. The existence of a margin
of safety is dependent on the price paid for an investment in
relation to its intrinsic value. The lower the price paid in
relation to intrinsic value, the greater the margin of safety.
Diversification
Investments in equities should be diversified to reduce risk. In a
portfolio which includes a number of good quality companies, the
positive results achieved by most are likely to more than offset
any disappointment in the others. However, if diversification is
carried too far, it reduces or eliminates the possibility of
achieving superior returns in common stocks. Excessive
diversification is one of the principal reasons why many mutual
funds fail to provide superior returns over the long term.
Therefore, we diversify enough to protect capital, but not so much
as to make it impossible to achieve superior returns.
Asset Allocation
Asset allocation is the process of deciding the percentage of an
investment portfolio to be held in the three principal asset
classes - stocks, bonds, and cash. We use asset allocation to
emphasize the classes of investments which we believe present the
best value at any given time, that is, the most reward and the
least risk
Buy and Hold
Once we have purchased at a bargain price we tend to hold through
subsequent fluctuations. Holding on to the shares of a high-quality company over the long term maximizes returns while
minimizing taxes. We sell only when a company's long-term
prospects have deteriorated significantly, or the price is so high
that it already anticipates and discounts the likely advances of
the long-term future.
Tax Management
Minimizing taxes is an important part of investing. What counts is
the total return to the investor after deducting costs and taxes.
In taxable accounts we minimize taxes in several ways. Our
portfolio turnover is low. We typically realize lower-taxed long-term gains, rather than higher-taxed short-term trading profits.
Tax-efficient management is something no mutual fund can ever
supply because: (1) a fund manager cannot possibly take into
account the tax position of the individual shareholders; and (2)
the tax laws governing mutual funds effectively preclude efficient
tax management for the shareholders.
Investment vs. Speculation
It is necessary to constantly keep in mind the all-important and
easily overlooked distinction between investment and speculation.
No one can predict the future movements of interest rates or short-term market fluctuations, so our investments are not based on
trying to outguess the market. No one can predict the future state
of the economy, so our investments are not based upon assumptions
about the future of the economy.
We see the difference between investment and speculation as
follows:
A share in a business vs. chips in a casino
The investor views a common stock as representing a partial
ownership share in a business, while to the speculator stocks are
virtual chips in the world's largest casino.
Profiting from the operation of a business vs. the operation
of the stock market
The common stock investor seeks to share in the wealth created by
the operation of a successful business. The stock speculator seeks
to profit from trading in the market.
Long-term vs. Short-term
The common stock investor expects to make money gradually over a
long time. The speculator hopes to make money in a hurry. True
investors wait patiently for attractive opportunities, then buy
and hold for the long term. Speculators buy and sell frequently.
Time is the friend of the investor. The longer an investor holds
his stocks, the greater his profits are likely to be. But the
speculator's losses are almost certain to mount the longer he
speculates. There are multitudes of investors who have enjoyed
significantly profitable returns from buying and holding common
stocks over the long term. There are few speculators who have both
made and kept significant profits from trading in stocks.
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