So...is that all there is?

By Norman F. Klopp, Jr., CFA, Partner

In our last two issues of “Perspective”, Al Meszaros and I described the critical importance of personal, on-site visits to corporations as a com-ponent of our investment management process.

Our answer to the question in the headline is “No...that’s NOT all there is” to managing our clients’ portfolios.

Added insight

Besides our own research, we analyze large amounts of additional and equally important research from external sources in order to acquire information about, and gain insight into, specific investment opportunities or developments that could influence the purchase of stocks for client portfolios. For example:

• We also need to know “what the street thinks” about a specific stock or industry. To that end we study comprehensive (and very costly) investment research reports from a number of investment research firms whose collective thinking about the earnings outlook or stock price of a particular company provides a “consensus” against which we can judge our conclusions. If my Partners and I believe a company can earn significantly more than that consensus, we might have potential for a real positive surprise versus the “street expectations.” That usually means positive stock performance.
• We use an Internet-based service that provides instantaneous access to hundreds of additional research reports, along with observations about industries and companies.
• Another critical component of our investment management process is the use of “interactive analytical databases” that provide valuation tools we can use to calculate our own estimates of earnings, long-term growth and cash flow. We perform detailed comparative analysis of competing companies and “sensitivity analysis” to determine the impact that factors such as changes in prices, unit growth, interest rates, or capital structure might have on the earnings or cash flow growth rates of a company.
• Perhaps the least recognized, but most valuable, research source is one I have discussed in lectures to college business school students. What is it? A well-filled Rolodex® (or, in this era, a Palm Pilot®).

Why? My partners and I have nearly 200 years of collective investment experience. We have built, re-built, and continue to expand lists (Rolodex cards) of hundreds of people in literally every type of business. We talk with them regularly. Our contacts include CEO’s and CFO’s of many Fortune 500 companies, operating executives, customers, government officials, plus academic and professional experts in a wide spectrum of industries.

This extensive network is very valuable because it provides us with knowledgeable sources of facts and opinions we need when events occur that might impact the future of a company or industry.

My unwavering message to those business students is that the network they build is a powerful asset that can provide a powerful perspective on the present and the future.

Revalidation required

At Midwest Investment Management, we continue to believe that successful investing over the long term requires diligence, control of risk, and a comprehensive perspective on a company and its stock. We continuously revalidate our perspective through the use of numerous internal and external research sources...including an overflowing, up-to-date Rolodex!