Unlikely Ally…

In an era of fake news, our investment research strategies raise an interesting ethical question. We aim to outperform the market through unique approaches, better mathematics, and a deeper reliance on history rather than speculation. We do not chase trends driven by false theories. However, it feels ethically murky to quietly benefit from the spread of financial misinformation. The people who promote flawed financial thinking have, unintentionally, become allies to our success.

We follow a five-criteria investment strategy. Each criterion has faced criticism from some part of the professional investment community — criticism not of our results, but of our definitions and methodology. Rather than being discouraged, we’ve found their objections helpful: they prolong market inefficiencies and give us more time to accumulate good companies at discounted prices.

Take Quality and Safety. Traditionally, these were viewed as conservative criteria — appropriate for widows, orphans, and bank trusts — but not for growth investors. Twenty-five years ago, I began incorporating both. Later, computers allowed us to backtest their effectiveness. I was surprised to find they didn’t just add safety — they enhanced returns. Another 15 years passed before Quality became recognized as an official factor. Safety, however, remains underappreciated due to how investment factors are defini…

Then there’s Value and Growth—typically treated as opposites. Value has become an official factor. Growth has not. But our model doesn’t accept that divide. We seek securities that show strength in both areas — what we call Growth at an Unreasonably Low Value.

Finally, we look for confirmation. Our preferred signal? Share reductions (buybacks). Our first model, designed in 1967, was a buyback model, and we’ve used buyback strategies ever since. Despite widespread acceptance of buybacks for options, bonds, and preferred stock, repurchasing common shares has always been controversial.

Forty years ago, Harvard released two papers on the subject. The economics department argued that buybacks were a poor use of corporate capital — better spent on R&D, expansion, or acquisitions. The business school countered that buybacks were management’s most effective financial tool. The debate still rages today, with financial advisors, analysts, brokerage firms, and especially politicians expressing opposition. Some of this opposition stems from accounting quirks that obscure the long-term benefit…

To sum up, we don’t believe in the old Wall Street adage: “It’s better to fail conventionally than succeed unconventionally.” Recent research shows share reductions offer the highest excess return of any investment anomaly — yet remain one of the least used tools.

Katz Family Financial