Capitalist Investment Services, LLC

Our Stock Selection Principles

Partners

Wealth grows in a capitalist system because it allows us to take on partners in our economic life. Adam Smith illustrates this at the beginning of the Wealth of Nations with an example of a “trifling manufacture”: the creation of a pin. Many men are involved in its production: “one man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head . . . .” Few of these men know each other, but they are able to act as partners and understand each other’s needs because they are all guided by the same profit-seeking impulse.

Consequently, we only buy stock in a company where we feel we can trust the CEO to act as our partner. He must own a significant portion of his company’s stock, so that his interests are aligned naturally with those of his shareholders, and he must also have demonstrated an understanding that his company exists not only to serve its officers, its employees and its customers, but most importantly its shareholders.

Freedom

Man thrives in a capitalist economy because he is free to pursue his dreams of creating wealth for himself by first creating it for others. Throughout human history, government has constrained this process once it moves beyond enforcing contracts, protecting its citizens against coercion, and providing a few universally enjoyed services.

We avoid companies and industries where the heavy hand of government constricts the entrepreneurial spirit.

The Business of Investing

The Rockefeller Foundation. Carnegie-Mellon University. Scranton, Pa. What do they all have in common? The fortunes that established them all sprang from real businesses: Standard Oil, U.S. Steel, Union Trust of Pittsburgh, George Scranton’s iron and steel manufactory. All their founders were business owners, not market timers, momentum players or newsletter touts.

We anchor our analysis of companies in the belief that behind the static of daily price oscillations, a business exists, and we ask ourselves some simple questions. If we had enough money, would we buy all of this company at the current price? If we could pocket its earnings, would its current earnings’ yield and prospects for future earnings’ growth be strong enough to merit purchase? If we owned the whole company, would an informed business owner be willing to buy it from us at a substantial profit within the next five years? We do not “play the market”; we rationally appraise businesses.

The Real Real World

Unlike many other “isms” such as communism, socialism, Maoism and Platonism, whose benefits to mankind exist mostly between the ears of academics and devotees, the fruits of capitalism can be felt and tasted. In fact, every businessman measures his ideas against hard reality every day. If he invests in a new product, he only needs some time and a look at the inventory on his shelves to know whether his idea has succeeded or failed.

In the same way, we attempt to quantify our investment principles and to test them against history and ongoing experience. Over the years, the greatest gain in a stock has come from buying a company whose earnings grow and whose price increases relative to those earnings. Consequently, we look for companies with p/e ratios that are low compared to the company’s earning’s prospects. This also allows for a margin of safety, since no theory works perfectly. One of the best ways for a company to grow its earnings is by having a high return on reinvested capital, so we emphasize this figure in our selection process. We are reluctant to sell, and we only sell all of our stock in a company if its long-term business prospects erode dramatically or if its price appreciates to absurd levels. We know that once we have identified a good company and purchased it at a good price, we may not do such a good job finding its replacement.

Experience and the study of history have taught us that almost no one consistently predicts the market’s direction or the future prices of stocks. Since we have no control over how the market will value a stock in the future, we focus on what we can control: the price we pay and the character and philosophy of the people who run our companies.

Keep in mind that there is no assurance that this or any strategy will ultimately be successful or profitable nor protect against a loss.

The opinions listed here are those of Capitalist Investment Services, LLC and not necessarily those of Raymond James Financial Services or any other entity.

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Member FINRA/SIPC. Capitalist Investment Services is an independent company.

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