Investment Philosophy
Safety and Security
Our goal is simple: We strive to maximize returns while minimizing risk. We take a conservative, value-oriented approach to investing. Many investors wrongly assume that in order to produce higher gains, you must take higher risks. Our experience tells us that by examining the downside risk first, we have a much higher chance for positive returns. As Warren Buffett has said, “Rule number one is to not lose money. Rule number two is to never forget rule number one.” While we cannot make any performance guarantees, we can assure you that our primary goal is always to focus on protecting against loss.
Administratively, we want to reduce your worries as well. You have full online access to view holdings, look at transactions, view and print reports, and deposit and withdraw money. Arquitos Capital Management has authority to make trades. The only withdrawals we are authorized to make from your account are for our management fees. We hope this arrangement gives you comfort and eliminates worries.
Investment Strategies
The goal of protecting against loss leads us to a unique portfolio management approach. Whenever possible, we strive to include three types of investments in your portfolio: deeply undervalued companies, arbitrage and special situations, and companies with superior leadership that we feel have the safety and potential to substantially grow over the long term.
Deeply undervalued companies. Arquitos Capital Management will only purchase securities for this category when we feel they are deeply undervalued. In the universe of stocks and bonds, the majority are fairly valued or overvalued. This makes our job easier. We simply don’t need to analyze those companies because we won’t buy them. Our work, then, is focused on analyzing those companies whose true value is not being reflected in their stock price.
Why do we focus only on undervalued securities? We do this primarily for safety. Analysis is fraught with risk: risks the analyst may not have seen and risks the company may not expect. The only way to protect against that risk is to buy the security at a much lower price than we think it is worth. This protects our downside and enhances our upside.
We look at many factors to determine if a company is undervalued. When discussing stocks, the investing world often primarily looks at the Price to Earnings Ratio and a company’s short-term earnings power. This is fine for a well established company with consistent earnings, but it often doesn’t work for those companies whose true values aren’t recognized by the market. Earnings can be manipulated by management and often don’t reflect a company’s true worth. We look at the balance sheet as much as the income statement. Often our focus is on the book value of a company, the amount of cash generated, and the assets which do not show up on an income statement. We also focus on revenue figures and margins more than earnings. Most importantly, we take a long term approach.
Special situations. The stock market is not always rational. That irrationality causes companies to sometimes trade at much lower levels than their true worth. As described above, this leads to opportunities for us. This also leads to volatility. In order to reduce that volatility and take advantage of mispriced companies, we may place a portion of your portfolio in a special situation. One example of this is taking advantage of a merger. If a company purchases another company, there is a risk that the merger may not close or that the closing may be delayed. This risk is reflected in the stock price of the company being acquired not fully reflecting the price offered. We will, at times, accept these risks.
Another special situation we may take advantage of involves a corporate spin-off. When a company spins off a division, the existing shareholders often indiscriminately sell the stock of the spun-off company issued to the shareholder. A shareholder bought the stock of Company X and isn’t interested in newly created, spun-off, Company Y. Also, the spun-off company can be too small for many institutional investors to hold in their accounts, so they must sell. This activity creates major downward pressure on the stock price and creates an opportunity for us to purchase a company at a discount. An additional plus is that the new company, now free from the bureaucracy and inefficiency of its previous management, is able to more successfully create shareholder value.
Finally, there are a variety of other special situations, such as liquidations or tender offers, of which we may take advantage. The purpose of these low risk, and sometimes high return, investments is to reduce volatility and create positive gains. While the returns in this aspect of your portfolio may not keep up in a rapidly rising market, they will help to protect your portfolio in a declining market.
Superior leadership. The final category we look to place in your portfolio includes companies in which we have a tremendous amount of faith in the management and intend to hold on to for the long-term. We think these companies have the knowledge and skill to profitably reinvest their earnings year after year, and we want to ride on their coattails. However, because we always want to have a margin of safety, we still won’t overpay for these companies.
The Arquitos Advantage
Arquitos Capital Management’s safety, investing approach, and active management provide an unmatched advantage. I look forward to answering any of your questions and discussing how Arquitos Capital Management can help you attain your long term financial goals. Please contact us at (571) 766-8089 or Steven.Kiel@arquitos.com. We look forward to hearing from you.