We regard shares of stock as part-ownership in a business. When buying shares, we attempt to receive more in business value than we pay in stock price. We seek to create a margin of safety by purchasing stocks when they appear to be attractively priced. Even so, holdings often still experience price dips caused by short-term market fluctuations, and we may try to exploit these dips by adding to positions.
Check Capital invests in durable growth companies. These firms generally meet the following criteria: a) annual profits greater than $200 million, b) an S&P stock ranking of B+ or better, and c) long-term historical annual earnings growth greater than 8%-10%. We narrow a stock universe of more than 15,000 stocks to roughly 150 companies, whose fundamentals we actively monitor.
Quality Growth Program portfolios typically consist of 15-25 stocks. The average holding period of a stock is often three-or-more years, resulting in annual portfolio turnover of less than 35%. When we find no appealing investment opportunities, a portion of portfolio assets are placed in a money-market fund to earn interest.
We do not time the market. We do not try to forecast the economy or short-term market moves. In fact, we believe neither can be predicted by anyone. The S&P 500 has risen in 39 of the last 50 years (ending 2015), or 78% of the time. We expect similar results in the future. Thinking that one can enter and exit the market at the right timei.e., beat 78% oddsis irrational. We buy and sell stocks based on value received, not on expectations of market movement.
Because there are periods in which the stock market and all management styles underperform, we suggest judging performance over several years, or longer. Well-founded investment strategies often enjoy outperformance after periods of underperformance. Thus, clients should take a long-term view and be careful not to exit when holdings are inexpensive.
Obviously, no rate of return can be guaranteed to clients. Nonetheless, our goal is long-term performance of 10%+ annualized. Consider the power of 10% compounding: a $500,000 investment grows to $800,000 in five years, $1.3 million in 10 years and $3.4 million in 20 years.
The stock market is volatile. While the S&P 500ís return has averaged about 10% per year over the last 50 years, only 20% of those years showed a return between 5% and 15%. The greatest extremes have been -37% and +38%. The market has declined approximately once every five years, and we also will have negative years. That said, the market and Check Capital have always rebounded. Therefore, money invested in stocks should not be needed for other purposes in the near term, and one is advised to take money from stocks only at a performance high.