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Quarter 2, 2016 Newsletter

As we celebrate Gamble Jones’ 60th anniversary, we thought it would be appropriate to review our investment strategy.  We have used this strategy to take care of client portfolios since the beginning.  Although the world has changed significantly, these investment tenets are as true today as they were when Jim Gamble opened the doors in 1956.

We are long-term investors rather than short-term traders. Investors look at a company’s long-term prospects, whereas traders try to capitalize on short-term price fluctuations.  In today’s world of internet and 24-hour cable news, short-term price movements are frequent, random, and impossible to predict.  However, the short-term prices are generally tethered to a company’s intrinsic value, which is far more stable.  As investors, we focus on a company’s long-term business fundamentals and generally disregard short-term price fluctuations.  In short, we focus on high-quality companies and let them create value for clients over time.

Cutting through short-term noise, a company’s fundamental value is determined by its ability to grow and generate cash flow for owners. Strong balance sheets and attractive returns on capital are good indicators of a well-run business.  Return on capital measures the cash flow that each dollar invested in the business generates.  An attractive return on capital signifies that a business generates excess cash that can be returned to shareholders or reinvested into the business.  Strong balance sheets are also preferred as they provide support in difficult economic times.

At its core, investing is a value proposition comparing what you pay to what you get. The price you pay is clear.  It is set by the market.  Getting your money’s worth is the hard part.  The art lies in determining what a company is worth.  We use a company’s business fundamentals to make this determination.  Once you decide what a company is worth, comparing it to the market price is simple.  If the current price is unattractive, either wait for a lower price or look for a better alternative.

Our focus at Gamble Jones Capital Management is on identifying securities that fit the goals of each of our 4 respective strategies. We realize our investors have different time horizons, and although we do not believe volatility is a measure of risk in the long run, it does impact investors who plan to draw on capital in the near term.  The companies we analyze range across the spectrum from less mature and growth-oriented to more mature and income-oriented.  The key tenets we have discussed throughout this letter hold true no matter the maturity stage of the investment we are analyzing.   We prefer that companies return capital to shareholders through dividends and/or share repurchase if opportunities to reinvest and generate attractive returns are not available.  Conversely, if the company we are analyzing is able to earn returns above its cost of capital, we prefer that capital be reinvested into the business.  In an economic environment where growth is muted, we seek companies with durable revenue streams and the ability to grow due to structural advantages or secular tailwinds.  Although finding these investments at reasonable prices is rare, when we do find them, we seek to make these positions core holdings.

We have received inquiries regarding the cash balances we hold in the strategies and feel it is worthwhile addressing our views on cash. We view cash as a strategic asset that is most valuable during times of stress and market dislocation.  Cash provides liquidity and allows us to take advantage of opportunities when other investors are fearful.   There is no formula or target level for our cash balances.  Instead, we allow our cash balances to fluctuate based on the investment opportunities that we find.  We may choose to sell a position and raise cash due to rich valuation, change in fundamentals, or better investment opportunities that become available to us.  Our investment team feels that having the current cash balance at our disposal makes sense given the mounting economic uncertainty.

Our investment approach has served us well over the past 60 years, and we continue to use it as we embark on the next 60. Although we currently believe the market as a whole is fairly valued, we do find select investment opportunities that appear attractive.  Market volatility can understandably be unnerving for investors, so it is important to keep a long-term perspective.  Once the short-term noise dies down, the substance of a company is what truly matters.  We stand ready to take advantage of long-term investment opportunities created by short-term price movements.

Sincerely,

Gamble Jones Capital Management, A Division of Gamble Jones Investment Counsel

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