Investment Filters

May 21, 2008

Every week here at TWST, we speak to portfolio managers who talk to us about how and why they invest the way they do. This week, Frank Martin laid out a concise list of filters companies have to go through in order for his company, Martin Capital Management to invest in them:

The Management Filter: “We want to make sure that their incentives are in line with ours as shareholders, that they are competent, that they are visionaries and oftentimes that they are large shareholders of the company, not because of egregious option programs but because they are founding shareholders. These are more and more difficult to find, but when we find them we really like them.”
The Price Filter: “I think it’s critically important at this juncture to talk about price. Given the prevailing financial and assumed-to-be economic circumstances, we need a purchase price that gives us a margin of safety that’s appropriate for the circumstance.”
The Understanding Filter: “We like businesses that we can understand. Many technology companies, for instance, would not pass this filter. We don’t know when the next competing product will come out of somebody’s proverbial garage and displace the leading players. All technology is subject to this kind of technological obsolescence, so it is very difficult. We stick with more understandable and, sometimes, more mundane businesses, and concentrate on buying them at prices that will give us an attractive return.”