General Investment Principles at Bastiat Capital

 by Albert Meyer, CA CPA

  1. Clients Retain Custody of Assets - We manage client’s assets through separately managed accounts at TD Ameritrade. We have no access to capital. We only have authority to executed trades.
  2. Transparency of Investment Process - Clients have daily online access to their brokerage accounts where all transactions and portfolio holdings are detailed.
  3. Capital Allocated Slowly but Deliberately - To mitigate risk, the process of allocating capital to equities is slow but deliberate. It could take anything from six to twelve months to convert all the cash into equities. This approach hurts investment returns during a period of strong market performance, as was experienced in 2013, but protects capital during periods of sharp declines. It also gives clients time to familiarize themselves with the process and boost their confidence. We like to buy when others sell in panic. The market goes “on sale” about three to four times a year. We set our buy prices and wait for the market to come to us. We do not charge a fee on the cash portion of the portfolio during this allocation period.
  4. In-Depth Due Diligence Process - We examine a company’s SEC filings in minute detail. We go back ten years, reviewing 10Ks (annual reports), 10Qs (quarterly reports) and proxy statements (corporate governance, board members, executives, compensation policies, etc.), among other documents. We want to understand a company’s business model, its growth prospects, its competitors, its capital allocation policies, the industry in which it operates, its management, the inherent risks, etc. We analyze 10 years of annual and five years of quarterly financial statements. We calculate growth rates, profit margins, cost margins, balance sheet ratios, debt levels, free cash flows, etc. We also prepare our own earnings model that projects the financial statements over the next 20 quarters (five years). We use this as a tool by which to judge our investment thesis and expectations going forward. We summarize our findings in a report for internal use.
  5. We Buy with the View to Hold “Forever” - The reason we engage in such thorough due diligence is because we prefer buying stocks that we can hold “forever.” The average portfolio turnover at most mutual funds is more than 100%, which basically means that whatever stocks the portfolio owned in January were all sold by December. This is like playing Monopoly. This is not investing. Churning a portfolio is costly. Buy-and-hold is only nonsensical to those who don’t know what they buy, or has no confidence in their research and stock picking abilities. Hence, they chase the latest fad or stock recommendations of the media’s so-called “experts.” We closely monitor what we own. We would sell if our initial assumptions are no longer valid, if fundamentals of the industry in which the company operates are deteriorating, in the event of management changes, acquisition or divestiture activities that make us uneasy, etc.
  6. Create a Concentrated Portfolio - The average mutual fund owns well in excess of 100 stocks. This kind of investing provides excessive diversification that protects the downside, but yields mediocre returns. Again, if the investment process is based on thorough due diligence, one can with confidence construct a portfolio of about 40 stocks that offers enough diversification, but promises above-average returns. Only in exceptional cases do we own non-dividend paying stocks. Dividend income provides cash flow for ongoing investment. The discipline of dividends keeps management honest and committed to the best interests of shareholders. We very carefully examine compensation policies as they provide us with insights as to whether insiders are in it for own gain, or not. The manner in which they grant stock awards (options) is almost always a dead giveaway. In short, our portfolios contain: a concentrated collection of great large cap companies, with excellent business fundamentals and robust growth prospects, the best of corporate governance practices, especially with regard to executive compensation, and preferably dividend paying.
  7. Detailed Performance Reports - Our biggest overhead is the cost related to our performance reports. Every day, at the close of the market, our portfolios are downloaded into the Advent Software platform of our service provider that produces our quarterly performance reports. These reports quantify a portfolio’s quarterly, year-to date, last 12 months and SINCE INCEPTION performance NET of FEES. Our clients are in no doubt as to how their portfolios have performed, not only for the current year in question, which is all that most advisers provide, but since inception. You can make 33% this year, but if you lost 25% last year, then you are only breaking even after two years. Only by tracking performance since inception can clients get a transparent and unvarnished picture of their returns.

For more information regarding investing, log onto or Albert Meyer CA CPA of Bastiat Capital, LLC.