“Timeless” Principles Will Guide Our Future

By Elmer L. (Al) Meszaros, CFA, Partner

Only a few months after Midwest Investment Management opened for business five years ago, the stock market began its descent into the devastating bear market that nearly matched the duration of the 1929- 1932 crash – 33 months to be precise. The NASDAQ market index collapsed by 80%, and the S&P 500 Index declined 50%.

Lessons reinforced

Fortunately, clients of Midwest Investment Management were able to escape much of that devastation. Nevertheless, that difficult and trying period taught us – or reinforced – some important lessons.

• Quality is critical – Devastating losses were inflicted mostly on the stocks of companies with lower-quality business models, weak profitability, high debt, and questionable growth prospects.
• Steady growth – We purchase only stocks of financially strong, growing companies with excellent business positions, and good profitability.
• Price paid determines return – Stocks that lost the most value were overpriced. Many investors ignored valuation disciplines. We place great importance on not overpaying for stocks. The models we use to determine fair value keep us disciplined.
• Research increases odds of success – Companies, especially in the Technology/ Internet world were not well understood by most investors. When difficulties arose, investors fled – causing further declines. Our visits to companies, a cornerstone discipline, enhance our understanding of strengths, weaknesses, competitive position and prospects.
• Diversification limits risk – Over the past five years, investment risks have increased, especially regulatory risk, and management malfeasance risk. If we are wrong in our analysis or blindsided by some unanticipated event, our last line of defense is the 3% position size of a 33-to-35 stock portfolio. This keeps losses to acceptable, far less painful levels.

Future strategy

So, how will we invest in the coming years? By sticking with the timeless principles of quality, steady growth, value price, research and diversification. The same principles that served our clients so well, especially during those painful 33 months not so long ago!