Success for our clients at Pinnacle Capital Management is a result of a simple philosophy. When markets offer sufficient returns given underlying risk, it is appropriate to take on that risk to generate investment returns. When markets do not offer sufficient returns given underlying risk, it is appropriate to forego returns and, instead, strive to protect capital. This philosophy applies to asset classes, sectors, and individual securities. Graphically, this approach can be represented by the nearby chart.
In order to apply this philosophy to individual security selection, we start with the question, “Which companies are likely to succeed given the ongoing economic, competitive, and demand environment?” Factors taken into consideration include overall business strategy, stage in the business life cycle, barriers to entry, level of demand, competitive strengths and weaknesses, lead times for capacity additions, impacts of changing technology, and current economic environment.
Once having found companies that we believe have a high probability of business success, we are able to have a greater level of confidence in our financial forecasts for those companies. Given those forecasts, we estimate underlying business values. In doing so, we take into additional consideration appropriate discount rates given current and expected interest rates, underlying levels of risk, and current and expected dividend payouts.
We ultimately build a portfolio of these securities whose current stock prices are favorable relative to our assessment of underlying business value, taking care to build in appropriate diversification. We constantly reassess our assumptions and valuations due to changing events and the passage of time. We sell an individual security if the market price reaches a level that exceeds our assessment of underlying value, if holding the company is no longer warranted given changes in our assumptions for the company, or if we need to make room for other investment opportunities with superior potential return and risk profiles.