The Reality CHECK
For Check Capital Management Quality Growth Program Investors
We regard shares of stock as part-ownership in a business. When buying shares, we attempt to receive more in business value than we pay in stock price. We seek to create a margin of safety by purchasing stocks when they appear to be attractively priced. Even so, holdings often still experience price dips caused by short-term market fluctuations, and we oftentimes try to exploit these dips by adding to positions.
Check Capital invests in durable growth companies. We strive to invest in firms that meet the following criteria: a) competitive advantages (wide moats) that insulate them from rivals. b) high quality and extended tenure of senior management, c) these managers having an ownership interest in the company, and d) long-term earnings growth greater than 8-10%. Our feeling is that during those inevitable business cycle downturns, companies that possess these attributes have low obsolescence risk. They might even take advantage of soft-market environments by taking more market share and emerging stronger out of the downturn. We attempt to purchase these companies at (what we believe to be) a discount to their expected future value.
Quality Growth Program portfolios typically consist of 12-15 stocks. The average holding period of a stock is often five-or-more years, resulting in very low annual portfolio turnover. When we find no appealing investment opportunities, a portion of the portfolio assets are placed in a money-market fund to earn interest.
We do not time the market. We don’t try to forecast the economy or short-term market moves. In fact, we believe neither can be accurately predicted by anyone. The S&P 500 has ended 39 of the last 50 years (ending 2024) with a gain, meaning 78% of the time. We expect similar results in the future. Thinking that one can enter and exit the market at the right time—i.e., beat 78% odds—is irrational. We buy and sell stocks based on value received, not on expectations of market movement.
Because there are periods in which the stock market and all management styles underperform, we suggest judging performance over several years, or longer. Well-founded investment strategies often enjoy outperformance after periods of underperformance. Thus, Check Capital clients should take a long-term view and be careful not to exit when holdings are attractively priced.
Obviously, no rate of return can be guaranteed to clients. Nonetheless, our ongoing goal remains long-term performance of at least 10% annualized. Consider the power of 10% compounding: a $500,000 investment grows to $800,000 in five years, $1.3 million in 10 years and $3.4 million in 20 years.
The stock market is volatile. While the S&P 500’s return has averaged about 10% per year over the last 50 years, only 17 of those years showed a return between 5% and 15%. The greatest extremes were -38% and +34%. And despite the market’s down periods, it has always rebounded to a new high. Check Capital has had a similar experience. Because of normal stock-market volatility, money invested in stocks shouldn’t be needed for other purposes in the near term. One should strive to take money from stocks only at a performance high.
To learn more contact Check Capital at (714) 641-3579 or info@checkcapital.com.