4LB Investments, LLC - Investment Research & Management

Why Invest with 4LB?

This document explains my philosophies of the investment business and supplements My Favorite Principles of Investing which describes those which have had the biggest influence on me. Additionally, 4LB gives me the opportunity to expand on the principles set down by others as well as the independence to work in an environment free from outside influences.

I am a fourth generation investor and have been buying stocks since I was in my teenage years. My father was an advocate of combining classroom knowledge with first hand experience and as such he guided me when asked but let me learn the hard way, which believe me I did! I do not remember when I realized the importance of the value investing concept, but when I did it was an enlightening experience. I set forth to determine the intrinsic value of a potential investment and would buy it below this figure. Investments were held until the market price and intrinsic value converged. It can take long periods for this to happen so patience is definitely a virtue. Likewise, long periods can exist whereby it is hard to find value due to extended market conditions. The 4LB name comes from the fact that there are four generations of Brackens that have been in the investment field and we have all had the letters L and B in our initials.

During the late 1990s and into the new millennium, investors drove stock prices to astronomical valuations thus creating the largest bubble since the 1920s. People were managing their own money, taking out loans to invest, talking about early retirement and a whole host of other things. When times are good, people tend to overlook details and rely more on information as presented. What happened was that individuals on Wall Street became both greedy in their pursuits and/or lax in their governance. The bubble eventually burst and the magnitude of the greed and lax oversight became apparent.

At a time in our history when it was crucial for individuals to plan for their retirement, there were many questions regarding large investment firms and their research, corporations and their pension plans and the state of the social security system in the United States. Baby boomers were reaching retirement age at a time when medical advances could possibly extend the average life expectancy by 30 years and many had just lost a large chunk of their savings.

Investing had held my attention for almost 25 years and even though I had limited experience working as a buy side analyst, I decided the time was right to set up shop. I was encouraged by several people around me as they knew they could trust me and liked my judgment. First and foremost, I believed in value investing which is described in more detail below. Second, I believed in doing my own research and relied on outside research on a very limited basis and never exclusively. Third, I believed in heading out to sea with my clients or owning EVERY investment I purchased for them. Finally, I wanted them do be able to work hard and enjoy time with their families never having to worry about their savings as I was on the job 24/7.

A basic understanding of value investing will be critical to determining if I may be of service to you. In a nutshell, value investors seek to identify what something is worth and purchase it for less; subsequently selling for a future profit. If I offered you a brand new Mercedes S500 (retail about $100,000) for $40,000 would you buy it? Well you probably would if you determined I was not trying to sell you a lemon. You could then turn around and sell it for the going rate and pocket the difference. That's what happens in the stock market. Value investors spend their time determining what something is worth, determining whether it is a lemon or not and investing in it when and if an opportunity presents itself. Intel is a tremendous company, but has not proven to be a great value recently. There is a distinct difference between a great company and a great stock. Value investors must also have great patience. Investment values only increase when demand exceeds supply and this can take years, in some cases, as one waits for the crowd to come around to the realization that a bargain exists.

Value investing has worked better over time than any other technique I have seen and I cannot understand why it is not practiced by more investors. This school of though was started by Benjamin Graham and subsequently practiced by the likes of Warren Buffett, Charlie Munger, Bill Ruane, Walter Schloss, Charles Brandes, Mario Gabelli and a host of others who have outperformed the market over time. My experience has been that either people understand it and want to use it for their own investments or they don't. I use value investing exclusively and have developed my own financial models in order to do research. Like any school of thought, each individual will have nuances but operate under the general principles. I tend to rely heavily on cash flow as it is the root of investing and harder to disguise in company financial reports. This principle alone saved me a lot of personal pain during the internet craze as cash flows did not even remotely begin to justify values and I stayed away.

I do not invest in areas with which I am not comfortable. Foreign stocks not listed in the United States are not in my circle of competence as I do not have a strong enough grasp of accounting standards in most countries to feel confident in scrutinizing companies using these standards. If they are listed in the United States, they must report their results using GAAP standards and hence I can then analyze them. Biotechnology is another area I am not competent in analyzing. (I almost puked when I had to dissect a worm in 8th grade and it went downhill from there!) I have read enough to realize that biotechnology offers tremendous opportunity so I may at some point feel confident in buying a basket of stocks related to this industry. I will not try to pick individual winners however. The point is that I invest in what I understand and like - mainly stocks in easy to understand areas.

I do my own research for several reasons. One, fundamental analysis using the current accounting system requires judgment. Different CFOs could look at a company's journal and come up with unique financial reports. The job of the financial analyst is to determine if sound judgment was used in reporting performance. I feel my experience has led me to develop an understanding of good long term business principles and determine if they are being used. Two, reading and scrutinizing the reports of others takes me about the same amount of time and hence I rely on my own work. Modern technology has made it much faster to analyze companies due to the ease with which one can get information and the automation of calculations formerly done by hand. Three, I waste no time on research put out by firms that have investment banking arms as ulterior motives exist. It would be difficult to convince me otherwise. Even independent firms use metrics that fall outside a value perspective so their usefulness is limited. Fourth, the best value investors in history have done their own research. My feeling is this has occurred for a reason; outside research doesn't measure up to value investor's standards. Finally, my models have nuances that I have not seen published. They may or may not be unique but this is hard to ascertain as analysts, like great chefs, rarely reveal the entire recipe! Investing is a competitive field and if one finds a technique that works, he had better keep it from proliferation or the advantage will be lost.

One of my biggest pet peeves with "stockbrokers" is that most are great at making recommendations but few own what they push on others. If you were in Las Vegas at a roulette wheel and someone said, "Put it on 8, it's going to hit!" what would you do? You could either trust them or analyze the situation yourself. I certainly wouldn't trust them if they did not make the bet themselves, however! I have seen the inside of some brokerage firms and most are comical. The "brokers" are told by "research experts" what is looking good and the brokers subsequently go out and call their clients to get the sale. Think about it, their success is counterintuitive to yours. If you trade, they make money and if you don't they don't. I differ in that I collect a fee based on the asset value of your account. If I make money for you, I make more for myself and vice versa. I also own the same assets as you in my personal account so your pain is my pain. Warren Buffett is a great example of this concept as the vast majority of his wealth lies within Berkshire Hathaway. There are some great investors in the world but I fear the vast majorities are poor and statistics support my thoughts. Find someone you can trust to make smart decisions with your hard earned money.

Finally, time has become increasingly difficult to allocate due to the increased complexity of our society. It never ceases to amaze me that people try to work by day and invest by night. I don't think it can be properly done. I don't try to be a doctor, lawyer or anything else for that matter so why should you? Proper investing is a full time job and not something to try in your spare time. The options are simple; make investing your profession or find someone you trust to manage your investments.

To summarize, I feel my investment style has proven itself superior over time, my personal models are strong, I do my own work so my thinking is not tainted by others, I put my own money where my mouth is and I pursue investing with a passion. My success is aligned with yours and the goal is to prosper in a controlled manner that will win out over time.