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Superior investment returns can be achieved by investing in stocks of companies which demonstrate a strong and consistent record of earnings growth and are purchased at a reasonable multiple of the growth rate. Don’t want to pay too much.
Things change. Therefore, it is critical to diversify. All investments will not prove profitable. The economy, as well as individual industries, is cyclical. Proper diversification, not only with individual stocks but also across industries, can help reduce risk.
Fixed income investments must also be managed with an eye toward risk. U.S. Government bonds have no default risk; but they certainly have market risk as measured by price volatility. Diversification by maturity helps to reduce price risk.
The following is a thumbnail sketch of HCM’s strategy with the major financial asset classes:
STOCKS
The equity selection process emphasizes characteristics that focus on financial strength and earnings growth with predictability. Particular emphasis will be placed on purchasing the stocks of companies expected to exhibit high returns on equity in the context of quality financial structures and strong management frameworks. Intensive research is employed to reveal stocks at price-earnings ratios that are low in relation to their earnings growth potential.
- Common stocks have returned an average annual rate of about 10.1% over the past 85years.
BONDS
Bond selection focuses on two main elements. First, only the highest quality bonds are purchased. This means using Government Bonds or Corporate/Municipal bonds rated in the top three categories. Second, bonds are diversified by maturity; often called “scheduling” or “laddering” maturities. The purpose is to optimize yields as opposed to attempting to predict interest rate movements.
CASH
The proportion of cash in the account at any given point is a result of opportunities in the stock and bond markets at the time. That is to say, no attempt is made to allocate assets or to time the markets. We will be fully invested if enough attractive investments are found. If not, we will maintain cash reserves in temporary investments.
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