Questions with Katz

As a reminder, last month we started a new series of letters where a question is posed for Larry (and the entire Katz Family Financial team) with the goal of educating and sharing the extensive amount of experience we have in this field.

QUESTION:
How do you select your investments? While others choose ETFs and mutual funds (holding hundreds of companies), you are confident in individual stock selection. What gives you this confidence to pick individual securities?

ANSWER:
In the first installment we discussed our confidence to be more heavily weighted in stocks and less in bonds than others in the field. Our stock selection process (along with our performance) is what gives us this confidence in equities. It is also what gives us the confidence to primarily pick individual securities over ETFs and mutual funds.

Our model requires all securities to have five factors. Safety, Quality, Value, Growth, and Confirmation. Just by using these factors an investor can outperform the market.

To substantially outperform the market, we evaluate thousands of stocks by pulling in dozens of data points and metrics. We run our own calculations off that data to determine how every company fares across each of our factors. We refresh the model every week at a minimum, ensuring we are always working from up-to-date information. All our factors/requirements are set well above the average, which leads to our recommendations averaging roughly double the strength of the average security in the Russell 3000 index. Essentially, we are looking for the top 0.5%–1% as the first pass.

From there, we dive even deeper. We use real intelligence, not just artificial intelligence, to review the ideas. We pride ourselves on disciplined data analysis followed by an added layer of unbiased research.

This detailed approach gives us confidence in our selections for our clients’ portfolios and our own. When a name is on our buy list, we purchase the security for our model. We do not recommend anything we do not own. We believe it is important that clients know we are experiencing every win (and pain) along with them (not to mention we want to be able to benefit just like our clients as well!).

Some closing background on stocks vs bonds:
For centuries it was known that bonds were safer than stocks. Exactly as economics would predict, to get investors to buy stocks, companies would have to pay higher dividends. Investors wanted income coming in greater than the interest they would receive from bonds. It was an investment rule that when bond yields were higher than stock yields stocks were overpriced and should be sold.

The twentieth century changed all that. Dow Jones and Roger Babson started a century of security analysis. Investors used more than just dividend rates in security selection. An atypical event occurred midcentury when bond yields (interest they paid out to investors) exceeded stock dividends. This time stocks did not decline. Stocks never yielded more than bonds again. Better data and the SEC forced companies to perform or disappear. Economics would conclude that lower dividend yields than bond interest says stocks are safer than bonds. Of course, that does not mean all stocks are safer or even that all stocks will outperform bonds.

*in the case of a discrepancy between Fidelity Investments monthly statements and Katz Family Financial monthly portfolio statements, Fidelity Investment statements should be deemed as the correct and accurate report source.