Before wealth comes a
wealth of information.
We aim for solid investment returns with a special emphasis on capital preservation. To do so, we employ a comprehensive, common sense investment approach, combining our “Big Picture” insight with a thorough security selection process. Our observations and insights on these issues have shaped our portfolio strategy, asset allocation and risk controls since 1979.
Big-Picture Insight (Top-Down Analysis)
We have long observed that markets often fail to grasp the significance of important factors that shape asset returns and risk prospects. These factors include questions such as inflation or deflation, cyclical or secular, stimulus or austerity. Sometimes these factors highlight huge risks hiding in plain sight that few notice and act on, like a mania in technology stocks, excessive leverage in the financial system, or a new, ill-advised policy from Washington. Other times they offer insight on the opportunity for gains.
Marrying our view of the macro-environment with each client need is the critical function at Cadinha & Company and our defining difference.
Interest rates are not just key to the income and price of a bond, they are a key component in measuring the value of stocks. We study interest rates—and the top-down factors that shape them—to identify value and risks. While it’s rarely possible to predict the short-term direction of interest rates, we believe that occasional policy changes (among other things) can significantly influence the direction of interest rates, and thus the direction of stocks, bonds and other asset classes.
Inflation / Deflation
Everyone knows that inflation means that prices increase for most of the goods and services we consume. But inflation has even wider ramifications. Inflation is also the devaluation of our money and a key component of interest rates. Higher inflation usually means higher interest rates, and deflation (yes, this is possible) does the opposite. Like interest rates, inflation is largely shaped by fiscal and monetary policy—sometimes directly so. Inflation is also a key component of our stock analyses. All things equal, we prefer companies with pricing power; companies that can successfully raise prices can protect against inflation—and even benefit from it—over time.
Taxes & Regulation
We closely monitor taxes and regulations because we know people respond to incentives and must adhere to rules. Changes in taxes—including income taxes, capital gains taxes, corporate taxes, and others—directly influence returns. Changes in the tax code that favor one form of income (like dividends) over others (like corporate bond interest) will incentivize investors to sell the higher tax income and buy the lower tax one. Regulations not only dictate actions and behavior but can also be a valuable source of protection for certain assets and companies while being the bane of others. In an era of increasing and changing regulation, we believe many investors ignore Washington at their peril.
While it’s important to focus on the growth of individual stocks, we think it’s also important to keep an eye on economic growth—where it’s happening and why. We care about where we are in the economic cycle and look for secular growth drivers, including demographics, productivity, trade, and policies to assess headwinds and tailwinds among regions and asset types. Within stocks, professional investors like to label stocks as either “growth” or “value.” We believe growth and value are inextricably linked—growth is a vital component of value. We seek companies with both growth attributes and value prices.
The influence of the world’s central banks has grown exponentially to the point that many are as powerful and influential as the governments they serve. Today, central banks including the Federal Reserve have many policy objectives to fulfill including full employment, growth, low and stable inflation, regulation, and a virtually limitless mandate to print and erase money. Perhaps never before has the Fed been so directly in control of interest rates and inflation, and as influential in asset returns. An almost natural business cycle has been increasingly replaced by a policy cycle, and it isn’t difficult to ascertain its tailwinds and headwinds. More difficult, and important, is identifying the risks and ramifications of escalating monetary interventions.
Our top-down and bottom-up insights combine to create a forward-looking asset allocation strategy—one that’s poised for the perceived risks and opportunities ahead, rather than based on past performance or conventional practices.
The final step involves you, our client. Your Cadinha adviser will work with you, now and over time, to customize our strategies and insights to your individual needs.
Stocks: Business Model
Durable and profitable business model. We look for understandable businesses with high and consistent returns on equity and capital to go along with a solid, long-term business plan.
Honest and able management. We look for talented management teams that think and act like owners. We focus on a key function of management: capital allocation, or what management does with earnings.
A cheap or reasonable price. Price is always a key determinant to any investment’s return and risk prospects.
Rather than just seeking income by holding a large number of fixed income securities across maturities and among various issuers, we seek total return (income plus capital appreciation) with a fixed income strategy based largely on our market views. We choose bond maturities based on our interest rate views and issuers based on their credit quality and yield.
While most professional managers eschew the idea of holding cash in client accounts, cash is a constant investment consideration for us. We will hold cash—sometimes in substantial amounts—to hedge against elevated risks. Holding cash also gives us increased power to seize compelling investment opportunities in the future.
Though we mainly invest in stocks and bonds, from time to time our top-down work identifies investment opportunities in other asset types such as gold, currencies and real estate-based securities. We may invest in these types of assets to hedge perceived macroeconomic risks and provide portfolio diversification or to seek additional returns.
Research-Driven Investments (Bottom-Up Analysis)
We rely on an intensive, research-driven process to identify liquid securities that meet our stringent criteria.
No matter what assets we choose to invest in, we will maintain high standards for quality and liquidity and acknowledge that some investment ideas and asset classes are simply un-investable.