October 2023

To Our Business Partners


As much as we try to live by our “investing with a margin of safety” tagline, we do from time to time make mistakes. We always look at what can go wrong and include worst case scenarios in our analysis.  But our experience over the years (averaging close to 40 years per partner) shows that we are going to strike out from time to time.  And that includes both errors of COmmission (buying a dud) and errors of Omission (missed opportnities).  In truth, we will continue to have those experiences, no matter how careful we are.  Since we nor anyone else have the capability to predict the future, despite claims to the contrary, we’re going to swing and miss sometimes.

In what is perhaps the most important chapter in his book, The Intelligent Investor, Benjamin Graham states:

The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities.  We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other.  THAT DIFFERENCE IS THE SAFETY MARGIN.  IT IS AVAILABLE FOR ABSORBING THE EFFECT OF MISCALCULATIONS OR WORSE THAN AVERAGE LUCK.  The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.

Therefore, the investor leaves room for possible mistakes by buying stocks at a large discount to underlying value so, if he’s wrong, he minimizes the risk of suffering a significant principal loss.

This is why we diversify!  In the very next paragraph following the above, Graham says, There is a close logical connection between the concept of a safety margin and THE PRINCIPLE OF DIVERSIFICATION.  Ample diversification to us when we build portfolios is to hold 12-20 of our best investment ideas, which helps reduce the impact of any mistakes.  (We’ll save our rant about owning too many stocks, or di-WORSE-ification, for a later date.)  While errors are always painful, and research has shown that investors feel much worse about losses than they feel good about gains, their impact is reduced by owning a portfolio with a broad mix of exposure to various sectors of the economy.  The key is having a majority of holdings perform satisfactorily over time which, as a group, will produce acceptable portfolio returns.


The sale of what could have been a rare mistake plus the purchase of a new company lowered the price-to-value ratio of our group of widely-held stocks* to a still-too-high 86%.  We have a list of buy candidates and stock prices seem to be coming our way.


Stock market indexes were down again in September. Declines were in the 3-5% range across all sizes of companies.  However, many of the indexes, mostly in the small and mid-cap category, are virtually unchanged or even slightly negative for the year to date.  As discussed, ad nauseum, only the NASDAQ Composite and the S&P 500 are up sharply this year, driven by just eight out of the index’s 500 components.  In fact, the “equal-weighted” S&P 500, in which every stock accounts for the same percentage of the index, is unchanged in 2023.  Over the last twelve months, the numbers look considerably better, because a poor September 2022 rolls off the time period.  Index returns for the period range from 15-25% for the big caps, to 7-9% for the small caps.  Our group* of portfolio stocks compares favorably to the indexes in all three time periods.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.