Preparing a Covered Call Corner spreadsheet for IOI members this week, I discovered a fund company based in Minnesota called Mairs & Power. The firm’s Growth Fund had made some interesting purchases in the fourth quarter, and I wanted to get a feel for the process the managers used to select stocks.
One of the white papers posted on the firm’s site – entitled “Focused Investing for the Long-Term – caught my eye especially because the paper does a good job of summing up the essence of what we too consider to be intelligent investing:
- Understand the underlying business
- Concentrate investment positions in companies that are undervalued
- Invest in businesses (i.e., bottoms up) rather than in themes (i.e., top down)
- Hold positions for a relatively long time
- Focus on reducing costs
This quote about long investing time horizons was one that especially stood out to me.
Researchers studying the markets over a long period of time have revealed a simple truth. The long-term patient investor consistently outperforms the impatient investor. Investment strategist and author Michael Mauboussin reviewed a select group of actively managed mutual funds that consistently beat the S&P 500 Index over a ten year period. He found that among their common attributes, the first was low turnover in portfolio holdings. He also cited a 1997 Morningstar Research study that found the lowest turnover mutual funds (turnover less than 20% per year) consistently outperformed higher turnover funds for 1-, 3-, 5- and 10- year periods. Mauboussin updated the research more than a decade later and found essentially the same results.
At IOI, we use the word “Ownership” to distinguish the long-term investing mentioned above with the short-term, frenetic action of speculators. Our video below explains the difference between “ownership” and “speculation” and lays out the steps we work through with every company to become intelligent owners.