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Wednesday, January 19, 2011

Reconciling Epoch's Sensible Investment Approach with Sir John Templeton's Advice

We previously shared content from Epoch Investment Partners (EPHC) in our 9/1/10 post, Epoch Investment Partners: "Ratio of equity free cash flow yields to bonds near 50 year highs" = More Value in Stocks than Bonds.

We mentioned then that Epoch's investment approach is fairly consistent with our primary investment approach: in a nutshell, focus on growing, franchise-type companies that generate meaningful excess cash flow and use the cash in shareholder friendly ways.

Below, we share a 12/31/10 video from Consuelo Mack WealthTrack featuring the CEO, Co-CIO & PM of Epoch, William Priest.
  • On this week's Consuelo Mack WealthTrack, Epoch Investment Partners William Priest has created a new paradigm for picking stocks, enabling him to beat markets and competitors with less risk. He'll explain how and where he is doing it (link to video).

His sensible key message: keep a global perspective and seek companies that generate consistent, significant excess cash flow with capable managers who allocate capital to the benefit of shareholders. Plus, while you're at it, emphasize less volatile holdings that maximize excess return per unit of risk across the portfolio.

We concur that his investment strategy makes common stock sense and works over time. Examples of our holdings that fit the billing include eBay (EBAY), Weight Watchers (WTW), j2 Global Communications (JCOM), and PriceSmart (PSMT). However, our investment strategy also includes caveats (detailed in CS$ Approach).

For example, recall the advice from the late Sir John Templeton (click for prior post) that we included in our 11/2/10 post, Parlux Fragrances (PARL): One Dollar of Value for Only 58 Cents - No Catch!:
  • "Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded and skeptical. Long-term top results are achieved only by changing from popular to unpopular the types of securities you favor and your methods of selection." (Source: The Book of Investing Wisdom)
In the Parlux post, we continued, "So, while it's great to seek out consistent, high margin, high ROE, high-barrier-to-entry companies, sometimes other types of companies or investments offer equally favorable -- or better -- investment returns over time."

Keeping an open mind and considering different sources of value brought us to our off-the-run holdings such as Sonic Foundry (SOFO), Parlux Fragrances (PARL), and Market Leader (LEDR). All of these companies have yet to generate consistent excess cash flow, but met our investment requirements by offering tangible margins of safety through other measures.

Indeed, like William Priest at Epoch Investment Partners, we prefer all of our companies to generate sizable, growing, and consistent excess cash flow that is prudently allocated by capable management teams. But, in the vein of the late Sir John Templeton, sometimes deviations from this strategy can uncover diamonds in the rough.

While volatility may be higher for these types of holdings, risk-adjusted returns may be quite favorable over time and disciplined exposure can also increase portfolio diversification.

We believe both approaches make common stock sense.

Happy investing,

Jeffrey Walkenhorst

Disclosure: no investments in Epoch funds or EPHC shares; long EBAY, WTW, JCOM, PSMT, SOFO, PARL, LEDR.

© 2011 Jeffrey Walkenhorst
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