Prospectus
Investment Objective
The account seeks to provide long term growth of capital through investment primarily in common stocks. Total return will consist mainly of capital appreciation or depreciation.
Investment Approach
The account will consist of an average of 10 to 20 stocks of companies of all sizes. It is a concentrated portfolio therefore the volatility is high. Stocks are purchased with the idea of buying a piece of the business, and not a piece of paper. All the focus is placed on the individual companies and their business as opposed to the stock market or the indices. There is no market timing, and stocks are purchased with the intention of holding them for a minimum of three to five years. The portfolio manager applies a "bottom up" approach in choosing investments. In other words, the portfolio manager looks at companies one at a time to determine if a company is an attractive investment opportunity and consistent with the characteristics below. If the portfolio manager is unable to find such investments, an account's uninvested assets may be held in cash or similar investments. In general, companies in the portfolio have the following characteristics:
- Strong Management
- Competent and Honest management with good track record
- Responsible management with interests in line with shareholders
- Significant stock ownership and reasonable salaries and stock options
- Good Businesses
- Favorable long-term outlook with predictable earnings
- Sustainable operating and net margins
- 5 Year average Return On Equity preferably higher than 15%
- Consistent growth of shareholder equity
- Attractive Valuations and Strong Balance Sheet
- Stocks selling at or below intrinsic value
- Attractive P/E, P/Book and P/Sales in relation to similar businesses
- P/E preferably less than the annual earning growth rate
- No or very little debt
- High quality assets (e.g. cash) and/or strong cash flow business
Companies with aggressive acquisition strategy are of no interest to us. On the other hand, we are very interested in companies buying back their own stock in a significant way. The account turnover ratio has been averaging about 30% for the past 5 years. Stocks are sold mainly for the following two reasons:
- If valuations become excessive in terms of P/E, Price/Sales, etc., and believed to be unsustainable.
- Unexpected changes or deterioration in the business fundamentals.
- To make room for another attractive investment opportunity.
Reports and Statements
The account custodians, TD Ameritrade and Morgan Stanley Smith Barney, mail each client a monthly statement, providing account balances, positions, and all the monthly activities. In addition, an informational progress report is mailed to each client at the end of each quarter by the investment advisor.
Expenses and Fees
| Management Fees: | 1.2% to 2% annually of NAV (Net Asset Value) subject to negotiation. |
| Brokerage Fees: | $9.99 for E delivery, $16.99 + $0.01 per share over 1000 shares for paper delivery at TD Ameritrade 0.3% to 1.1% annually of NAV at Morgan Stanley Smith Barney based on the NAV. |
| Other Expenses: | 0% |
Investor Profile
This investment may be appropriate for Investors who:
- Seek capital growth
- Have long-term investment objectives, no less than 5 years (Short term speculators better look elsewhere)
- Investors who understand and can withstand the volatility of the stock market
The minimum initial investment is typically $100,000 and the minimum subsequent investment is $100.
Risks
The Account has a high return potential with corresponding high price fluctuation. The Account "Non-diversified" status allows it to invest more than 5% of its assets in the stock of a single company. To the extent the Account invests greater percentage of its assets in a single company, the Account has greater exposure to the performance and risks of the stock of the company. The account's value approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. If the account has large holdings in a relatively small number of companies, disappointing performance by those companies will have a more adverse impact on the account than would be the case with a more diversified account.
This investment is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit Corporation or any other government agency.
As with all managed account investment, there can be no guarantee that the account will achieve its objective. Furthermore, the account value can fall because of weakness in the broad market, a particular industry, or specific holdings. The market as a whole can decline for many reasons, including adverse political or economic development and changes in investor psychology. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, my assessment of companies held in the account may prove incorrect, resulting in losses or poor performance even in rising market. Finally, the account investment approach may fall out of favor with the investing public, resulting in lagging performance versus the overall market.
Important Disclosures
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy, including the investments and/or investment strategies recommended and/or purchased by adviser, will be profitable or equal to corresponding historical performance levels.
The investment advisor manages an account for himself and his family in a manner similar to all of his clients. The advisor and his family own all the securities owned by his clients.
The advisor is not actively engaged in a business other than giving investment advice. He does not receive any compensation directly or indirectly from any third party such as TD Ameritrade and Morgan Stanley Smith Barney or any other brokerage firms or insurance companies. In addition, he does not directly or indirectly compensate any person for client referrals.
When purchasing or selling stocks for multiple accounts, all stocks are bought and sold in the advisor's block account. At the end of the trading day, all trades are combined, averaged out, and allocated to the clients' accounts to ensure that each client receives the same average price for the executed securities.
More disclosures on the advisor's ADV form Part II, which is available upon request.