FIM Group's Steadfast Approach to Investing

by Paul Sutherland

Posted March 10, 2010

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March Edition

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PDF Version

For the foreseeable future it is very likely that most investors will be focused on the economy, inflationary and deflationary forces, and politics. They will settle for getting their financial advice from journalists and economists who have had little to no training or experience as investors, and all of this will result in overall market volatility. FIM Group clients need to keep in mind that we are neither indexers nor benchmarking, stock market-riding investors. Rather, we are disciplined financial managers, and we invest where we believe there is profit to be made. We think that the U.S. and developed European economies will eventually come to their senses and realize that stimulating investment and business is beneficial for the tax coffers and deficit reduction. Governments don't create wealth – they take their cut from a productive pocket, put it in someone else's pocket and call it "economic activity."

We believe the majority of Americans and Europeans want their companies and employers to grow, be sustainable and operate ethically. It appears that in many areas of the world, governments view business as a necessary evil or maybe just simply an enemy. Demonizing entrepreneurship, success and business will only cause business to go elsewhere, where it is welcome, and people feel grateful that they have a job. While the creative destruction going on in the old economies of our world are unpleasant, governments do little to fix it and a lot to mess it up. Regulating to deregulate and adding taxes upon taxes only discourage companies and form a barrier to long-term economic success. Vital and vibrant business activity will go on, and profits will be made by those with the vision, desire and ability to work harder and smarter. FIM Group's investment process is designed toward investors who are well-compensated for taking on risk and who have a reasonable and sustainable margin of safety.

Imagine that your portfolio is constructed in such a way that even if the economy just quit growing, taxes increased and inflation doubled, you would not be concerned at all about your investments! Imagine further that if we experienced significant deflation, increased unemployment and government debts skyrocketed out of control that you still would not be concerned. We feel that every FIM Group portfolio is truly constructed to do well even if the normal economic and financial forces of recession, inflation, deflation, tax increases, unemployment, deficits and such continue. Why are we so confident? The reason is HEF.

HEF = Health, Energy, Food

On page 3 is our stock selection investment process that continuously guides our choices. When we bake in all the inputs, we find that our portfolios are well-positioned to benefit from three areas of the economy – health, energy and food/commodities. What was a blessing in disguise about last year's financial tsunami was that it regarded both great and bad investments in the same way … it made them all cheap. It made great companies in the health care, energy and food businesses investment bargains. It also made companies in the areas of the world that are on the right side of the deficit's paradigm bargains. If you look at your portfolio and drill down on the "why" of your portfolio's holdings, you will find investments with great prospects regardless of how the overall economy, stock market, inflation or governments of the world performed. Of course they will fluctuate. Of course they will have volatility. But every year thousands of companies disappear. Our investments aren't with speculative companies that were constructed in cyberspace and passed off as investments. They are solid companies with good books of business and in industries where they have created a hard-to-replace niche, competitive advantage and are well-priced. We expect that these companies will grow earnings, dividends and sales over the next five years. Will they have some bad quarters? Yes! Will their sales fluctuate? Yes! What follows is why we believe the trend will be up.

Human Nature

Darwin maintained that those species that survive and thrive are not necessarily the biggest or the smartest, but are the most flexible. Humans survive because we are flexible. Americans are modifying their behaviors due to our recession. The chart on consumer behavior below compiled by Delhaize tells the story. People today are using coupons, consolidating shopping trips and "brown-bagging" it at work to save money. It's now "cool" to be frugal.

It's Cool to Be Frugal

More than ever people are becoming turned off by excessive consumption. For example, current luxury automobile advertisements are not pushing the "look at me, I am successful" button to compel consumers to select their brand. They are pushing the safe, value and durability buyer buttons. In other words, they are appealing to practicality versus stature. We are allowing our brand loyalty to slide in the name of common sense and frugality. Store brands are consistently gaining market share as consumers shop for better value. Private label growth demonstrates the significant decrease since January 2008. Also, consumers are making it more difficult to target and effectively receive marketing. Advertising was down significantly in 2009 as consumers made different choices and spending decreased. As shown in the chart on page 2, advertising spending worldwide has been affected by the slow worldwide economy and recession.

One Company at a Time

At FIM Group, we select each investment because we feel it will deliver positive returns going forward. We favor the companies that have solid management, produce needed products and will benefit from the trends in both the developed and developing worlds.

Often it can seem overwhelming to view all the holdings in your portfolio. We welcome the opportunity to sit down in person or on the phone to discuss what you own and why. We have found that once clients really understands their portfolio, they sleep better at night and really see the benefit with our strategy. Please don't hesitate to call or e-mail us to coordinate a time to review yours.