RMHI Investment Methodology

RMHI invests in a concentrated portfolio of approximately 20 stocks for Growth and Balanced oriented investors.  Balanced investors will hold the same stocks with added fixed income for income and stability. Appropriate Growth investors can be up to 100% invested.

For investment selection RMHI focuses on companies which have demonstrated stable and consistent returns on capital and linear price performance relative to the S&P 500 index.

Shares of companies that meet our criteria show high rates of Return on Invested Capital “ROIC” usually above 25%.  ROIC measures the percentage return of profitability earned by a company using the capital invested by equity and debt providers. It is a measure of efficiency as to how capital is deployed and the return earned after deployment.

ROIC is defined as:

Operating profit after tax = Net Operating Profit

The Net After Profit is divided by Total Invested Capital which is a combination of total equity, dividends paid and debt.  

The result equals Return on Invested Capital or ROIC.

The companies we look to invest in are considered “compounders”. A compounder is a solid modestly levered business franchise that has demonstrated a consistent use of capital which has allowed its common stock to multiply in value over an extended time period. Common traits found are high cash flow generation, modest leverage, which have generated superior risk-adjusted returns across the economic cycle.”

The initial research for this strategy can be traced to investors such as Warren Buffet. In 2016 Morgan Stanley published “The Equity Compounders”: The Value of Compounding in an Uncertain World.” By Paulson and Derold.

This is a long term strategy that is not suitable for short term or risk averse investors.

These are considered high quality companies with recurring consistent revenues with pricing power that are only modestly affected by economic cycles. These are dominant and frequently name brand companies that hold a significant advantage for potential rivals.   

The companies we prefer are those with “Moats”. They have significant advantage over any potential competitors.  Ideally the companies we choose to invest in are monopolies or duopolies. Monopolies and duopolies are attractive since they have pricing power which allows them to raise prices without concern for customer departures. Moats create barriers of entry for new competition which protect profit margins and pricing power.

Frequently new companies that offer a new product or service that don’t have a moat are inviting potential competition which reduces pricing power and profit margins.   

Examples of High ROIC with a Moat are: Microsoft, Moody’s and Intuit.

Source: The Equity “Compounders:” The Value of Compounding in an uncertain world. Morgan Stanley International Equity Team 2016 Paulson and Derold

We strive to make our services available to a variety of investors, therefore we manage assets with Charles Schwab & Co.