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Why my investment firm is different

Tuesday, September 15th, 2015

I was introduced to a woman last week who asked what I do for a living. When I told her that I run an investment firm, she said, “Oh, my husband does the same thing. He works for UBS.” I get this reaction from many brokers as well that they do the same thing that my firm does.

While I listened to her call her husband a wealth manager, I realized that while we both may be in the world of finance, what we do is in no way the same.

My firm, Wilsey Asset Management, is a registered investment advisory firm. We don’t buy and sell mutual funds, alternative investments or annuities that pay us a commission as a broker. My firm manages an individual concentrated value portfolio. You may ask what that means.

First, individualized means that all my clients’ accounts are kept separate with their investments. You may think that your broker does the same thing by keeping your portfolio separate, but what I am talking about is the actual investments.

When you hold investments in mutual funds or ETFs with your broker, your money is combined with other investors and your performance can be hurt by the other investors adding or deleting from their accounts. When my firm invests in, say, ABC company, each client actually holds the shares of ABC company.

For example, when we buy $10 million of ABC company, each one of my clients that meet certain investment criteria will receive a certain number of shares based on a 6 percent value of their account.

In other words, my clients actually own small pieces of the companies that we buy as opposed to shares in a mutual fund. My team and I have devised a comprehensive system so that each client’s account is invested very close to my own personal account.

I also make a concentrated portfolio for my clients. The portfolio is considered concentrated because I will not invest in more than 15 to 18 different companies.

This may seem risky to the average investor, but there is actually a financial formula that states 15 companies give the investor the best return with the least amount of risk. If you would like this formula, please contact my firm and we will send it to you.

It is also important to make sure that these 15 companies are invested in different industries, such as energy, technology, pharmaceutical and banking, just to name a few. And my firm watches the concentration of any one company to make sure it does not become excessive or over-concentrated.

The last part of our strategy is the value of what we buy. If you have read my columns and newsletters or listened to me on the radio or TV, you would know some of the fundamentals we look at to make sure we are getting value for our investments.

Very briefly, we look at the valuation ratios, such as what we pay for the earnings, sales, book value and cash flow of the company. If the company pays a dividend, you want to understand the earnings the company uses to pay that dividend and how much is left over to continue to run and grow the business.

We also look at the sales growth and earnings growth quarter over quarter and year over year to make sure the business is moving in the right direction. An important part of our strategy is to make sure we are not buying high debt. Companies with low liquidity could file for bankruptcy, which would wipe out the entire investment.

In addition, I want to make sure that the company is making a profit at the bottom line, along with checking to make sure there is a decent return on equity of about 15 percent. And I want to see how effective management is in managing the inventory and receivables to make sure there won't be problems down the road.

Last, we come up with a target sell price looking ahead 18 months or so, based on the mean estimate of the analysts who are providing earnings estimates. I then use a forward multiple price earnings of 16.5, which has been the average over the last 40 years, which will give me a target sell price.

In addition to all that, each quarter I read all the information on the company's recent earnings release, including all the financial statements and a conference call, which is filled with great information about what the company has done in the past and their plans for the business.

This is a summary of what our individualized concentrated value portfolio is. Maybe you'll understand now why I may get frustrated when a broker says he does the same thing that I do, when all he does is sell someone mutual funds, some type of annuity or alternative investment. This broker is paid a commission and has no vested interest in the future value of your portfolio.

I should also point out the higher standard that a registered investment adviser firm has, which is a fiduciary responsibility to put clients in the best investment. Brokers have only a suitable investment requirement, which means it doesn't have to be the best investment, just suitable.

Do you have a question or a company you would like us to take a look at?
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