Mr. Carnevale: First of all, my name is Chuck Carnevale, and I am the Chief Investment Officer, co-Founder and co-CEO. Our firm was founded in 1992 under the name EDMP. In October of last year, we merged with another firm and we now go under the name Great Companies, Inc. We have about $400 million in assets under management, we are a separate account manager and our product is primarily large cap growth. We manage assets using a very common sense based formula. We endeavor to own great companies, which we define as companies that generate above average, superior, consistent long-term operating results, far in excess of the average company. We seek a target rate of return objective of 15% to 20% growth, which great companies have historically achieved. The second part of our formula is that we are only interested in a company, even the greatest company, when it is simultaneously a great investment, and we define that as selling at a sound valuation that is reflective of its True Worth or intrinsic value. Our contention and our belief is that if we follow that simple formula of great companies plus great investments, we should generate great long-term returns at very controlled levels of risk.
TWST: How did you come up with the philosophy of "earnings determine market
price" and how have you developed it into your investment process?
Mr. Carnevale: Actually, it's kind of an interesting story. Our offices sit
adjacent to the University of Tampa where I got my Economics and Finance degree.
I graduated from there in the early 1970s. During one of my lectures, my
economics professor showed me a piece of research that Pershing had published
where they correlated the earnings of the S&P 500 to its stock price going back
about 30 or 40 years and up through 1965. What really astounded me was that the
long-term correlation and the common sense idea behind the notion that there
would be a long-term correlation in earnings and market price turned out to be
very profound. This made such an impression on me that it became my life's work.
My wife and I founded a firm in 1992 called EDMP, which is an acronym for
Earnings Determine Market Price. Basically, my whole career has been dedicated
to understanding, exploiting and identifying the long-term correlation and
functional relationship between a company's operating results and its market
price over time. In very simple terms, to us, it is just logical that the better
a business does as an operating company, the better its shareholders can expect
to do over the long run.
I think it is also important to point out that we tend to be very long-term
oriented. Our basic goal is to buy $1 worth of earnings today that we anticipate
will grow into $2 worth of earnings in three to five years, which represents a
15% to 20% compounded, above average growth rate that, as previously mentioned,
has actually been achieved by numerous companies. In fact, all the companies we
own in our portfolio can speak to the fact that over the past five, minimum, and
preferably 10 years, they have compounded earnings in excess of 15% a year, and
that we obviously still expect them to grow at an above average rate in the
future.
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