We invest in what we believe are our very best ideas and leverage those ideas by maintaining portfolios that are reasonably concentrated.



•A willingness to look in all corners of the market for opportunities – small, mid, and large stocks. We generally do not set limits on the size of our “fishing pond.”

• We do not regard ourselves as “growth” or “value” investors. We believe it’s possible to combine the best of growth and value investing.

• We firmly believe in the importance of a consistent, disciplined, unemotional process for buying and selling stocks.

• Addition by subtraction – avoiding what we believe are the very richly valued or very low-quality stocks that can torpedo a portfolio.



Investment Process



Our system is a process that can be described in five steps:

1. Look for stocks that score well in Quadrix® across multiple metrics — the concept of “clearing many different hurdles.” To get past this first step, stocks must meet certain threshold scores in our Quadrix system in terms of Overall score as well as in important subcategory (Value, Performance, etc.) scores. We look for stocks with Quadrix Overall scores above 80 and preferably above 90.

2. Investigate pool of high Quadrix scorers rigorously. Make sure the Quadrix numbers are telling the full story. We consider whether the Quadrix numbers have been distorted by mergers or aggressive accounting, and whether earnings and cash flow are telling a similar story.

3. Examine company and industry prospects, trying to look forward. We want to have an understanding of the company prospects, which can help put the Quadrix scores in perspective. We generally avoid companies with the most uncertain outlooks. We are not necessarily looking for the fastest growers or the cheapest stocks. Rather, we are looking for companies that we believe are in the sweet spot of growth at a good price.

4. Reconsider valuation. Valuations are a big part of Quadrix, but we want to be doubly sure that the picture painted by Quadrix and other indicators is not already reflected in the stock’s price.

5. Look for a catalyst. At this point we’ve got a pool of stocks that meet all four of the above criteria. We believe they are solid companies, it’s just a question of which of these stocks can be true standouts and truly represent what we believe are the best picks in their group or sector. What is it about this company’s outlook that’s likely to drive superior returns over the next 12 months? What is it we think this stock has that’s better than other stocks that also score well in Quadrix? What is it about this company’s position that could drive superior returns over the next 12 months (which is generally the time frame we have in mind – 12-month performance – when buying stocks)?

By relentlessly repeating this five-part process and looking for opportunities in nearly all corners of the stock market, we seek to get a good sense of the opportunities available in U.S. stocks. We also get an idea of whether the stocks currently in our portfolio truly represent what we believe are our best ideas.

Above all else, we believe success in this business depends on discipline. Without a disciplined strategy, we believe you’ll never be able to duplicate success or reduce the incidence of failure. Our strategy is to consistently and relentlessly search for the best 12-month picks based on our Quadrix-driven system of finding growth at a good price.



Sell Discipline



• Deteriorating Quadrix® scores.

• A surprise that suggests our rationale for buying a stock is no longer valid.

• Constant competition between stocks to be among what we believe are our best ideas. The idea that “good is not good enough.” If a stock is no longer among our 35 to 45 best ideas, we typically sell.

• Taxes — we do not typically let taxes drive investment decisions. However, we do examine holding periods (short term versus long term) when selling a stock from an account. Also, we do look for opportunities for “tax harvesting” in tax-sensitive accounts.



Risk Control



1. Diversification across stocks. We tend to approximately “equal weight” positions in portfolios. Thus, we do not concentrate our investments in just a few stocks. However, we do not constantly rebalance back to equally weighted positions; we will let our winners run, for example. We typically trim individual stock positions if they exceed 5% of the portfolio.

2. While we do not weight our sector exposure equally with a benchmark, we do try to make sure that we do not have big, oversized bets in any one sector. Typically our maximum sector exposure is 40% of a particular portfolio strategy.

3. The constant competition to be invested in what we believe are our very best ideas provides an important discipline when it comes to controlling risk. Thus, we may sell a perfectly good stock simply because we have found what we believe is a better stock and do not want to increase our number of holdings.

4. Our quantitative stock-rating system (Quadrix®) is not only used to pick stocks, but also is indispensable as a tool for ongoing monitoring of portfolio holdings. We are constantly getting important quantitative feedback about our stocks via their Quadrix scores (we update Quadrix weekly). Thus, we have a quantitative, definitive way to see when a stock may be on the decline and may be suitable for a sale (i.e., deteriorating Quadrix scores, etc.)

5. Tactical investing. We are not afraid to hold cash in portfolios if we believe macro market conditions warrant playing defense or we are not seeing attractive opportunities in the market. Our main indicator for determining the market’s primary trend is the Dow Theory, a tool Horizon Investment Services has been using since inception and our affiliates have been using for more than 70 years.

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