Wisconsin Capital Management

Investment Team: Tim O'Brien, Tom Plumb, Ken Cavalluzzo

OUR PHILOSOPHY

Our investment philosophy is theoretically sound, time tested and very basic. First, we prefer to invest in high-quality businesses. These can be defined as simple businesses in growing markets that generate huge returns on shareholders' equity without too much debt leverage and are likely to continue to do so because of some sustainable competitive advantage. Of course, everyone prefers high-quality businesses to low-quality businesses and prices usually adjust for this. The stock market does this automatically as the stocks of higher-quality businesses almost always are more expensive than the stocks of lower-quality businesses.

Even a high-quality business can be a poor investment if too high a price is paid. That's why we demand a second criterion be met before making an investment - a cheap price relative to value. We typically will wait for a high-quality business to trade at 70% of our estimate of intrinsic value before we start to invest. This margin of safety serves us in two ways. If we're right about the prospects of a business our investment return is greatly enhanced. But if we're wrong about the business prospects, we won't lose a substantial portion of our capital.

We wish that we could always totally fill our portfolios with obviously superior, well-entrenched businesses trading at substantial discounts to their values. This, however, is not a reasonable expectation except at the bottom of a brutal bear market. The implication is that during most market environments we have to augment our ownership of cheap high-quality businesses with some even cheaper average businesses.

Our sell discipline has three rules. Our primary rule is to sell when an investment is priced at a premium to our estimate of value by the marketplace. We also will sell if we anticipate that the fundamentals of a company will deteriorate and this deterioration is not reflected in the market price. Lastly, we will sell an investment if we find another company of equal or higher quality that is significantly cheaper.

The members of our Investment Committee are all generalists and spend the majority of their time thinking about investments. We rely little on Wall Street research but instead perform independent fundamental and valuation analyses to draw our own conclusions. The Investment Committee formally meets weekly and informally almost continuously throughout each day. Collectively, we decide which trades to effect in the portfolios.