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5 Key Lessons From Top Money Managers

In an excellent book “5 Key Lessons From Top Money Managers”, the author, Scott Kays, interviewed Andy Stephens of Artisan Mid-Cap Fund. The following is a summary of Stephens’s investment philosophy.

“Security Selection"

* Acquire companies with reliable cash flows. Look for firms that possess structural competitive advantages capable of protecting those cash flows from competition. A structural competitive advantage can be a dominant market share, a proprietary asset, low-cost producer status, or a defensible brand.

* Calculate the present value of a corporation's future cash flows to determine its fair market value. Try to buy the business at a sizable (ideally at least 40 percent) discount to its value.

* Buy companies just prior to the start of their profit cycles, looking for firms that are experiencing internal and/or external changes. Internal changes include such things as a new management team, a big acquisition or divestiture, a major restructuring, or a new product launch. External changes include new technologies and regulatory events.

Portfolio Allocation

* Maintain a garden-a portion of the portfolio that includes small positions in stocks that meet your requirements but have not yet entered their profit cycles.

* Increase your positions in companies as they begin their profit cycles and move them to your crop-that part of the portfolio where you take bigger positions in firms that have proven their abilities to meet your growth expectations.

* When a stock reaches your target price or its profit cycle begins to decelerate, reduce or eliminate your position in it-harvest it.

* Do not time the market; always remain fully invested.

* Reduce the size of your crop and increase the size of your garden to lower your risk during economic downturns when profit cycles are sparse.

* Do not overconcentrate in a single sector of the market.”

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