We start with a conviction that optimal long-term investment returns in the securities markets come primarily from a group of companies that have demonstrated revenue, earnings and dividend growth on a consistent basis over long periods of time. Our investment process is organized around these companies—finding them, understanding them, monitoring them, valuing them. They form the core of the growth and income balanced portfolios we manage. The remainder of the investment process then involves managing the risks and opportunities around this core. The specific approach differs for each client as we account for their individualized objectives, including risk tolerance or a greater or lesser emphasis on current income or long-term capital appreciation.
What are the characteristics of a company that can become a core long-term investment? More than anything else it probably has a “great” business, deriving from a special technology or patent position, or a unique asset, or a valuable brand, or the ability to lock-in its customers, or scale that produces the lowest cost, or a mutually-beneficial networked relationship with customers. These attributes help to protect the business from ruinous competition and are likely to allow the company to earn a high return on investment, build a strong balance sheet, and generate cash to finance future growth. This in turn can lead to above-average long-term sales and earnings growth, often with more consistency than in the broad economy. A skilled investment manager can then further enhance the return provided by the underlying growth by buying or selling, adding or trimming when a company’s stock is under- or overvalued.
“Optimal” means the right balance. While the balance point may be different for each client, in all cases it involves mitigating risk. We believe that “great” companies are inherently less volatile, but overvaluation in their stock price can increase their risk; economic and securities market cycles also introduce a different dimension of risk. While we don’t believe it’s possible to forecast stock market movements, we do believe that experienced investment managers can recognize periods of greater or lesser risk and opportunity. Thus, our approach to portfolio management is flexible. We vary our portfolios’ balance between equities, cash and fixed income not only to reflect longer-term goals such as growth or current income, but also to respond to shorter-term economic and market conditions. We also remember that risk and opportunity are two-way streets: a smart manager knows to cut his losses before they become damaging, but he also knows that selling his winners too soon can be equally costly.
Each client of Garrison Bradford deals directly with one of the firm’s principals, where the conversation about the optimal balance is a continuous process.
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