At Davidson Trust Company we follow a philosophy that may be characterized as Growth at a Reasonable Price. We focus our research effort on successful companies with solid competitive positions, sound financial controls and the outlook for above average earnings and sales growth over a three to five year time horizon.
Having identified these successful companies, we apply a totally separate methodology that focuses on determining the appropriate valuation of the stock of the company. The fundamental outlook for a company is only relevant to the stock’s investment potential when it is compared to current investor expectations. A company with a 15% earnings growth potential is a strong company but it could be a potential disaster as an investment if expectations are for a 20% rate of earnings growth. Because the stock market is a discounting mechanism, the direction of a stock’s price, either up or down, is created by the change in investor perceptions that result from the actual performance of a company in relation to its prior investor expectations.
An individual stock may be suitable for investment based on the longer term potential of the company, but the stock may be relatively unattractive over the near term based on overvaluation of the current price, unrealistic earnings expectations or the economic sensitivity of the company based on the maturity of the economic cycle. During any given year, most common stocks can fluctuate by as much as 20% to 30% as investor expectations range from optimistic to cautious and vice versa. Our investment goal is to not only purchase attractive companies but to do so at attractive prices. This continuing focus on valuation levels is not only useful in initiating positions but also in signaling the need to trim or sell positions. While the majority of our relationships are sensitive to tax considerations, the creation of a measured amount of capital gains is certainly preferable to forfeiting past appreciation by failing to take profits when valuation excesses begin to surface.
The behavior of the financial markets during prior economic and market cycles are an excellent benchmark in determining the sustainability of current valuation levels. The use of longer-term historic perspective has proven to be especially valuable in highlighting periods of temporary risk or opportunity within the financial markets.
At Davidson Trust Company we provide clients with sound individually designed investment strategies for diversification, to provide a relatively safe and steady growth in income and principal value. Our overall investment philosophy is not to maximize investment returns over the short term but rather to achieve the best possible longer-term returns that fit within the risk parameters and individual investment profile of each client.
