Investment Approach
An effective investment program provides the foundation
for personal financial success. Harnett Investment Advisers strives to provide this foundation through disciplined adherence to modern portfolio theory and value investing principles.
Modern portfolio theory states that investing in a combination of non-correlated financial assets (for example, U.S. and international stocks, government and corporate bonds, commodities and cash) can provide the same or greater investment returns than less diversified financial portfolios while significantly lowering investment portfolio risk (the “ups-and-downs” in portfolio value that most of us wish to avoid).
Value investing is the most highly regarded investment philosophy in the financial world today. It was first developed by Prof. Benjamin Graham from Columbia University over 50 years ago. In addition to Prof. Graham, value investing has gained prominence over the years by many of the world’s greatest investors, including Warren Buffett (an early disciple of Ben Graham’s) and Mario Gabelli.
Value investing is based on performing financial analyses of public companies (or other financial assets) to find and invest in those companies whose intrinsic or “fair values” are significantly greater than the price at which their shares currently trade. This “margin” or difference between the true value of a company’s shares and their current price may occur for a variety of reasons: A company may suffer a short-term strategic setback or have a temporary decline in sales; the industry in which the company operates might receive negative press, or a senior manager may depart the company etc. An over-reaction to any of these events might result in many of the company’s shares being abruptly sold, depressing the company’s share price well below what its future prospects (based on the company’s current and future profits) suggest the shares are worth. By identifying and purchasing shares of fundamentally sound companies for client accounts in such situations, we seek to obtain them at bargain prices. Doing so, we provide significant long-term potential for share price appreciation and attractive client investment returns.
The firm continuously conducts financial analyses and ultimately makes investments for client accounts only after our analyses indicate a company or a group of companies (an industry sector), for example, is undervalued by 25% or more on a relative or absolute basis.* After being selected, investments in client accounts are regularly monitored to ensure they continue to meet the firm’s stringent investment criteria.
Longer-term, investments that appreciate greatly and no longer represent significant opportunities, and investments that do not perform well are periodically sold off, while more compelling investment opportunities are selected as a result of ongoing investment research.
* "Relative value" analysis refers to valuing a company’s shares by comparison to shares of similar companies in its industry sector. “Absolute value” analysis refers to valuing a company’s shares by analyzing its current and projected cash flows.