Realities & Expectations

• We regard shares of stock as part-ownership in a business.  When buying shares, we attempt to receive more in business value than paid for in stock price.  We seek to create a margin of safety by purchasing stocks only when they appear to be attractively priced.  Holdings frequently experience price dips caused by short-term market fluctuations.  When appropriate, we attempt to exploit these price 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) S&P stock ranking of B+ or better, c) 10-year earnings growth greater than 10%.  These criteria and other filters enable us to narrow a 15,000-stock universe to roughly 135 stocks, whose fundamentals we actively monitor.
• Quality Growth Program portfolios typically consist of 15-25 stocks.  The average holding period of a stock is approximately three years, resulting in annual turnover of about 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 are not in the business of forecasting the economy or short-term market moves.  In fact, we believe neither can be predicted by anyone.  The market has risen 39 of the last 50 years, or 78% of the time.  We expect similar results in the future.  Thinking that one can enter and exit the market at the right time—i.e., beat 78% odds—is 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 three years is the minimum time necessary for clients to judge returns.  Well-founded investment strategies often enjoy outperformance after periods of underperformance.  Thus, clients should take a long-term view.
• 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.
• Clients should remain aware of the stock market's historic volatility.  Yearly returns have typically been in the -10% to +30% range, with rare extremes of -40% to +50%.  Also, the market has declined approximately once every four years.  We, too, will have years with negative performance.  After experiencing a down year, we have always achieved a new high within one to four years.  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.