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philosophy
MONEY MANAGEMENT PRINCIPLES
For the vast majority of individuals, their most profitable investment is
their home. We believe the reason for this success is twofold.
- Considerable care is taken in the selection of the particular property
to be purchased. This thorough evaluation includes close inspection of the
physical condition, floor plan and quality of construction as well as such
attributes as the community, school system, recreational facilities,
shopping, etc.
- Equally important is that the purchase of one's home is viewed as a long
term investment. Therefore, the indiscriminate sale of the property does not
occur based on some experts dire prediction that interest rates will rise, a
recession is on the horizon or even a world economic collapse is imminent.
Ironically, most people view an investment in a corporation differently. The
best illustration of this completely opposite attitude is expressed by the
term "stocks" and "the stock market". You typically hear people remark that
they bought stocks and/or invested in the stock market, but you never hear
people say that they bought deed. They say they bought a home or a house. In
reality, both a stock certificate and a deed are nothing more than legal
papers that represent ownership. And just like you own your home, an
investor owns part of a corporation selected for investment.
This may seem like a minor point, but it is this attitude that causes most
people to treat investing in a corporation more like a trip to Las Vegas or
Atlantic City than a commitment to their financial future. How often have
you seen someone "buy stocks" based on a single phone call from a
stockbroker or a tip from an acquaintance?
Just like buying a home, investing in corporations requires careful analysis
and a long term view.
Investment Objective
Our investment objective is two fold:
- Provide a high degree of safety by minimizing risk.
- Achieve an average 15% annually compounded return over each five year
period.
To meet these objectives, the challenge is to identify companies for long
term investment that offer excellent growth while at the same time provide a
high degree of safety. While very basic, this is the essence of professional
money management. There are a large number of speculative investments
available that offer the chance of substantial gain, but unfortunately they
also carry carry high risk of substantial loss. Examples of these higher
risk investments are small companies, highly cyclical companies, turn around
situations, high technology companies, take over candidates, etc. Due to the
risk of catastrophic losses, non of these fit our objective to provide a
high degree of safety.
On the other hand, growth in one's personal wealth is the fundamental reason
for investing. To gain a perspective of what long term appreciation means to
one's financial success, achieving 15% annually compounded growth results in
the increase in portfolio value over a thirty year period equivalent to a
one time $10,000 investment growing to $640,000 and an annual $2,000
contribution growing to $1,000,000.
INVESTMENT CRITERIA AND SELECTION
There is an old but true joke that there are three important qualities to
look for when purchasing real estate- location, location and location. There
is a close parallel in selecting a corporate investment with the three
important aspects being quality, quality and quality.
In selecting excellent corporations for investment to meet the previously
stated objective, in very basic terms
- Lower risk equates to quality
- growth equates to long term trend
In order to reduce risk, only high quality major American companies are
selected for investment. These companies also are exceptionally strong
financially with limited use of debt and strong cash cash flow that
comfortably exceeds capital expenditures. Due to higher risk associated with
smaller companies, only major American growth companies are considered for
investment. Furthermore, due to rapid change, high technology is avoided;
due to financial leverage pure savings and loan, banking and insurance
companies are avoided and lastly to protest against a recession, commodity
based businesses such as steel, gold, oil, paper, etc. are avoided
To achieve growth the following long term trends are looked for:
- consistent growth in earnings per share with average growth of at least
12% compounded annually.
- consistent growth in dividends.
- limited debt, and cash flow exceeding capital expenditures and dividend
payments.
- strong products with dominant market positions.
- direct participation in a national and/or world situation that creates a
continuous long term growth trend independent of the economy.
The best illustration of a current long term trend that equates to an
outstanding investment opportunity is the aging of the world population
combined with longer life expectancies. As a result of this trend, an ever
increasing amount of money is being spent for health care. This inevitable
event will occur consistently over at least the next forty years regardless
of the world economic outlook. Consequently, selected pharmaceutical,
hospital supply and drug retail companies represent excellent long term
investments.
Obviously very few corporations meet the above criteria. We at J. L.
Bainbridge & Co., Inc. would appreciate the opportunity to meet personally
with you to explain each in more detail and relate them to specific major
corporations selected for current investment.
CONCLUSION
We strongly believe that the future of the United States economy is strong
and full of long term prosperity. However, in our view, no one can predict
the near term future. Therefore, the best investments must provide safety
and long term growth regardless of whether strong economic growth, inflation
or recession is on the horizon. This does not mean that in every year our
investments will increase in value by 15% because clearly there will be
years where our returns fall short of our objective and in some years we may
experience a decline. However, we firmly believe that these years cannot be
accurately forecast, and consequently, the key to consistent results over
time is to select quality that provides protection against large market
declines and growth that provides long term appreciation. With this approach
are expectation is that the results in some years would exceed 15% such that
over a number of years an average return of 15% compounded annually would be
achieved.
In closing, we want to again draw an analogy to your investment in your
home. Your home is an excellent investment because of your careful selection
and long term commitment. Would you achieve the same results if like the New
York Stock Exchange, there was a New York Home Exchange and you could see
the current price of your home every morning in the newspaper and instantly
buy and sell via a simple telephone call to your broker?
The lack of patience, the natural tendency toward fear (caused by the
constant hype of the financial, publishing and broadcast industries) and the
temptation to make quick profits are the causes of poor investment returns.
It should not be assumed that past results will be achieved in the future or
that a loss could not be incurred. Furthermore, the 15% annually compounded
return is an objective and should not be assumed that a 15% annually
compounded return will be achieved.
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Dedicated to client
satisfaction
Our goal is to maintain
lifetime client
relationships. We are
confident that we can
satisfy client investment
needs in that clients have
absolutely no obligation to
pay our management fee
unless they are completely
satisfied.
Jerry Bainbridge, President
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Building a portfolio for you
using high quality growth
companies in order to
achieve meaningful long-term
growth.
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- Large cap
risk adverse growth
investing
-
Understanding businesses
-
Monitoring revenue streams
-
Understanding trends
-
Consistent and sustainable
- Earnings
growth minimizes risk
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1582 Main Street
Sarasota, Florida 34236
(941) 365-3435
(800) 899-5171
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