Joseph: Hello, my name is Joseph Imbriano, from Stock Advisor Canada, and I’m joined by chief investment adviser, Iain Butler. There have been two questions that we have been hearing often, and we wanted to give you answers to them right now from Iain, himself. Iain, how are you doing today?
Iain: Very well, thanks Joseph.
Joseph: Iain, take us through the big picture. What is our investment philosophy? What is the Foolish way of investing?
Iain: Well, I think we’re quite different than most operations out there in that we really do take a long-term approach to investing. We don’t get caught up in the day-to-day fluctuations that go on. We’re here to find great businesses, recommend them to our members and, hopefully, hold them forever, basically.
Joseph: So, that’s the big picture. As we move into determining, say, this month’s stock picks, what specific criteria do you and your team look at in making this decision?
Iain: There’s three primary areas that we really focus on: First is to get an understanding of the business; second is getting a feel of the management team that’s operating the business; and third is a financial review of the company’s history and what we think it might look like going forward.
I’ll just going into a little bit more detail. On the business side we want to find dominant businesses that we think are going to have a fantastic sort of long-term trajectory. We want them to have competitive advantages, which are rare, for sure, but they certainly exist, and they are something you can find. And we want to understand why that business is where it’s at and what’s going to drive it forward; how they make money, what their revenue model is, all those different components go into understanding what that business is.
From there, we want to understand who’s running the business. People are what make up companies and we want to know that we have the right people on our side. The ideal situation for us is when we find a significant inside ownership stake and ideally the founder is still very involved because you know that they’re passionate and driven and that’s the kind of people we want running our companies.
Third is basically a financial review. We want to see how the company has performed in the past and whether or not we can be confident that the future will look sort of like the past or, ideally, even better. Cash flow is probably the biggest focus when we’re determining a company’s health. Free cash is a life-line for a company, and without it you’re at the mercy of the markets and can get into a lot of trouble. So we want to see free cash generation, consistent free cash generation. And, growth is important too, so growing topline.
Financial risk is something we’re very cognizant of and something that we want to guard against; heavy debt loads can kill a company and we’ve certainly seen that plenty of times over the years, and we obviously don’t want to make a recommendation to our members that goes under. So, debt is something that we take very seriously, and if there is a lot of debt on the balance sheet, they better have the cash flows to support that debt and ideally to get rid of it over time.
Joseph: Business, management, and financials. Ok! Well there you have it: two questions, and two answers from chief investment adviser, Iain Butler. Thank you for being a member of Stock Advisor Canada and stay Foolish