INVESTOR PRESENTATION
November 2016
TABLE OF CONTENTS
Executive Summary.........................................................................................3
Investment Managers.......................................................................................4
Forever Investing.............................................................................................5
What to Expect When Investing Into Stocks...................................................6
Why Invest with Emerging Investment Managers...........................................7
Separately Managed Accounts.........................................................................8
Hierarchy of Investor Needs.............................................................................9
Target Investments..........................................................................................10
Six Types of Common Stock Investments......................................................11
How We Find New Investments.....................................................................12
Risk Management.........................................................................................13-14
Allocation of Assets........................................................................................15
Don't Try to Time The Market .......................................................................16
Our Edge.........................................................................................................17
Contact Information........................................................................................18
Disclosures and Disclaimers...........................................................................19
2
EXECUTIVE SUMMARY
ACCOUNT OVERVIEW
Account offers a concentrated portfolio of exceptional
businesses with outstanding management.
Our very low turnover results in a lower tax burden than
higher turnover strategies.
Our interests are aligned with our clients. We are driven by
performance, not performance fees.
Separately managed accounts provide greater transparency,
lower fees, and more flexibility than mutual funds, hedge
funds, and private equity.
We are closing the fund to new investors once we reach our
target of $200 million in assets under management. Our bias
is towards businesses in the $500 million to $10 billion range.
We want to always maintain the flexibility of investing
without diminishing the universe of our potential
investments.
November 1, 2016
Target assets
Current
$200 million
Redemptions
Transparency
no restrictions
Custodian
Broker
Scottrade
Legal counsel
Acct. statements
Brouse McDowell
$6 million
24/7 access to acct.
Scottrade
Monthly
Account Details
Min. investment
Management fee
Incentive fee
Lock up
Introduction
We do not invest into high risk, speculative investments no
matter the potential upside. Our number one goal is capital
preservation.
Launch date
NONE
1.31%
NONE
NONE
3
INVESTMENT MANAGERS
Michael T. Nowacki, Co-Chief Investment Officer
Nowacki Asset Management, Co-Chief Investment Officer (2011-present)
M&P Bargain Books, Co-Founder (2007-2015)
Education
The Ohio State University, B.A. Economics
Ohio University, M.A. Financial Economics
Author of the highly acclaimed book Forever Investing: The
Investment Strategy of History's Greatest Investors.
Joe Frankenfield, CFA, Co-Chief Investment Officer
KeyBanc Capital Markets, Equity Research (2015-2016)
PNC, Asset & Liability Management (2014-2015)
PNC, Corporate Banking (2010-2014)
Education
Miami University, B.A. Finance
4
FOREVER INVESTING
As opposed to "long-term" investors who purchase companies with a 3-5 year
horizon, we search for companies we want to own forever.
Having a target holding period of "forever" creates a highly selective and disciplined
approach. The objective is to purchase companies that will increase in intrinsic value at
above-market rates over time—and purchase them when they are selling well below
their intrinsic value.
5
WHAT TO EXPECT WHEN INVESTING INTO STOCKS
If you invested into the U.S. stock market in 1928, you would have had to endure 14 recessions (including the Great Depression and
2007-2009 financial crisis) and World War II, the Korean War, the Cold War, Vietnam, and the Gulf Wars.
U.S. Timeline of Recessions and Wars
Stock Market Crash of 1929
Great Depression 1929-1933
Recession of 1937–1938
Pearl Harbor and U.S. enters World War II 1941-1945
Recession of 1945
Recession of 1949
Korean War 1950-1953
Recession of 1953
Recession of 1958
Recession of 1960–61
Bay of Pigs Invasion in Cuba 1961
Vietnam War 1965-1973
Recession of 1969–70
1973–75 recession
1980 recession
Early 1980s recession 1981-1982
Early 1990s recession 1990-1991
Gulf War 1990-1991
2001 recession
War in Afghanistan 2001-present
Iraq War 2003-2011
Great Recession 2007-2009
Despite the many conflicts and short-term economic challenges, if you invested $100,000 in 1928 you would
have had $290 million at the end of 2014.
Period
1928-1932
1933-1936
1937-1941
1942-1945
1946-1948
1949-1965
1966-1974
1975-1999
2000-2008
2009-2014
Total
Annualized Returns
-12.7%
30.1%
-8.4%
24.6%
0.6%
16.3%
0.1%
17.1%
-3.6%
17.0%
9.6%
Cumulative Returns
-49%
187%
-36%
141%
2%
1202%
1%
5083%
-28%
157%
289940%
Source of Data: Aswath Damodaran, professor NYU
6
WHY INVEST WITH EMERGING MANAGERS?
MOST FUNDS HAVE THEIR BEST YEARS IN THE
FIRST 2-3 YEARS OF OPERATING
A 2008 study by two professors, Rajesh Aggrawal of University of Minnesota and
Philippe Jorion of University of California Irvine, says the following about
investment managers:
"We find strong evidence of outperformance during the first two to three years of
existence. Controlling for size, each additional year of age decreases performance
by 48 basis points, on average. Cross-sectionally, early performance by individual
managers is quite persistent, with early strong performance lasting for up to five
years.”
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BENEFITS OF SEPARATELY MANAGED ACCOUNTS
SMAs have numerous advantages over Mutual Funds, Private Equity, and
Hedge Funds. They are more efficient, transparent, and liquid, and lower cost.
Separately
Managed Accts.
Equity Mutual
Funds
Private Equity
Hedge Funds
management fees
1.31%
1.3% - 1.5%
1.5% - 2%
1.5% - 2%
performance fees
none
none
20% of profits
20% of profits
Transparency of Positions
and Allocation of Assets
All holdings,
24/7 access
All holdings, quarterly
filings with SEC
Monthly/quarterly
updates, valuations
subjective
Monthly/quarterly
updates
accounting firm
Not necessary
Required
Required
Required
audit
Not necessary
Required
Required
Required
none
varies
Multi-Year
Multi-Year
Immediate
24 hours
months
months
turnover
LOW
Moderate
LOW
HIGH
Can Invest Multi-Billion Dollars Without
Diminishing Returns
YES
Unlikely due to widening
diversification
YES
VARIES ON STYLE
Highly Liquid
LIQUID
Illiquid
LIQUID
YES
UNLIKELY
YES
YES
Lock Up Period
Redemption of Capital
Liquidity
Can Take Activist Positions
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HIERARCHY OF INVESTOR NEEDS
Don’t
Permanently
Lose Money
OUR FOREVER INVESTING
ACCOUNT IS DESIGNED
TO FULFILL INVESTOR
NEEDS
beat inflation,
net-of-fees and taxes
maximize returns for your
investment strategy, net-of-fees
and taxes
9
TARGET INVESTMENTS
We target young/growing companies, platform companies, and outstanding
businesses that meet our five filters.
Young Companies
• Young companies with double-digit long-term growth rates can provide exceptional long-term returns. It
is difficult to value these businesses, but every few years we may find one that we believe is an
outstanding business and selling at an attractive price.
Platform Companies
• A platform company is a business that uses its cash flow to serially acquire other business within its
industry. Whenever you hear of a company making a “bolt-on acquisition” or “tuck-in acquisition” in the
same industry, it is creating a greater platform. Standard Oil building its oil refining monopoly through
consolidation is the prime example of a platform company. Investors and analysts forecast organic
growth because companies that grow through acquisitions
(inorganic) are difficult to value. This dislocation of value creates opportunity.
Five Filters
1.
2.
3.
4.
5.
Is the company within our circle of competence?
What will the company look like in 10-20 years?
Does the company have sustainable competitive advantages?
Does management have a reputation for integrity, strong capital allocation, and driving organic growth?
Is the price attractive? Is there a margin-of-safety?
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SIX TYPES OF COMMON STOCK INVESTMENTS
Turnarounds
Slow Growers
(HP, Genworth)
(GE, IBM)
1
Cyclical
Businesses
(Oil, Steel, Autos, Airlines,
Agricultural Equipment)
3
2
Asset Plays
(Sears Holding)
4
5
Fast Growers
Stalwarts
(Google, Berkshire
Hathaway)
6
(Amazon, Chipotle)
OUR TAKE ON EACH TYPE:
1.
Cyclicals are unpredictable and typically don’t have competitive advantages. They are often high risk/high reward.
We don’t like high risk.
2.
Turnarounds are sometimes bargains, but they are struggling businesses and speculative. They are high risk/high
reward. We don't like high risk.
3.
Asset Plays can stay cheap indefinitely if there is no way to bring the value of the assets out of the company.
4.
Slow Growers can be great businesses, but they must be at a very compelling price and management must excel at
allocating free cash flow. We do not invest into companies that we believe can't at least triple in 10 years.
5.
Fast Growers are extremely difficult to find at attractive prices, but when we find them they are often the most
rewarding investments of any type.
6.
Stalwarts are our favorite investments. These are predictable businesses with strong competitive advantages and
great management. The challenge is finding them at attractive prices.
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HOW WE FIND NEW INVESTMENTS
MONITORING:
There are 4100 domestic companies on
NASDAQ and
NYSE. After eliminating the poor businesses that lose money,
companies we don’t understand well, and ones that are
impossible to predict, we are left with a few hundred of the best
businesses in the U.S We study these companies closely and wait for
opportunities to buy 1-2 a year at attractive prices.
THIRD-PARTY REPORTS:
We read reports on over 3500 different
companies from Value Line and
S&P Capital IQ.
CORPORATE CHANGE
EXPERIENCE
An IPO, spin-off, major aquisition, or
new CEO can increase uncertainty
and cause a dislocation of value.
With a dozen years of
experience, we are
familiar with many of
the high quality publicly
traded companies.
NEWS
We read a plethora of magazines,
newspapers, websites, and
trade journals.
RESEARCH
There are no substitutes for
reading 10-Qs, 10-Ks, and
conference call transcripts.
LIKE MINDED INVESTORS
We read the SEC filings of other top investment
managers with a similar investment philosophy
to find companies that might not have been on
our radar.
12
GREAT BUSINESSES ARE LESS RISKY IN LONG-TERM
In the short-term, momentum and valuation are more important than growth of
intrinsic value. In the long-term, the quality of the business and growth of intrinsic
value are of greater importance.
“Time is the friend of the great business and the enemy of the bad business.”
2-5 Year Expected Performance
5-10 Year Expected Performance
High Valuation
BAD BUSINESS
FAIR Valuation
LOW Valuation
High Valuation
GOOD BUSINESS
FAIR Valuation
LOW Valuation
High Valuation
GREAT BUSINESS
FAIR Valuation
LOW Valuation
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RISK MANAGEMENT PROCESS
RISK MANAGEMENT FILTERS
Companies that Increase in Intrinsic Value: We invest into high quality companies we believe will
increase in intrinsic value over time. Over long periods, a stock’s return is strongly correlated to the
increase in intrinsic value of the company. If the intrinsic value of the company is increasing, the
probability of losing money on the stock decreases over time.
Outstanding Management Teams: We invest into companies that we determine have a management team
with integrity and talent. Outstanding management teams can add value during market turmoil through
shrewd acquisitions and stock buybacks.
Limited Weighting of Each Holding: We have a maximum initial investment of 15% of our total
portfolio into one company. When a holding becomes 25% of the portfolio we trim our position to avoid
overexposure.
Price: Our focus on buying when we determine the company is selling below intrinsic value creates a
“margin of safety”.
Contrarian Opinions: We read short-sellers opinions to find perceived flaws in our analysis.
Selectivity: We maintain a focused portfolio of 10 - 20 holdings and our objective is to never
permanently lose money on an investment. We are very selective and only look to add one or two
outstanding ideas a year.
Low Fees and Taxes: Our low fees and low turnover reduce the risk of under-performing, net-of-fees and
taxes.
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ALLOCATION OF ASSETS
• Our portfolio targets 10-20 holdings.
• We constantly search for the 1-2 new
outstanding ideas we find in a year with an
expeted investment horizon of "forever".
• We invest primarily into highly liquid
companies with market caps of $500 million
to $10 billion.
• We invest primarily into U.S. companies.
• We do not use margin or short stocks.
Top 10 Holdings
Platform Specialty Products
Nomad Foods
Liberty Global
Stericycle
AmerisourceBergen
Colfax
Zimmer Biomet
Liberty LILAC
Chase Corp.
Cash
15
INVEST LONG-TERM, DON’T TRY TO TIME THE MARKET
Peter Lynch was one of the greatest mutual fund managers, earning 26.4%,
or nearly doubling the 13.3% return in the S&P 500 in his 13 years as
portfolio manager.
That said, when the fund was open to the public from 1981 to 1990, the
average investor only earned 13.4%, vs. the fund’s 21.8% return and the
S&P 500's 16.2% return over that period.
Instead of investing in the fund and staying in it, the average investor added
money after Peter Lynch just outperformed the market and withdrew money
when the fund was underperforming.
To receive the benefits of a talented long-term investor, you must stay
invested over the long-term.
Source: Nathan Hale, MoneyWatch, July 16, 2010, Lessons From a Great Fund Manager's Record
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OUR “EDGE”
WE HAVE SIX ADVANTAGES OVER OTHER INVESTMENT MANAGERS:
1.
Our fee of 1.31% of AUM and 0% of profits gives us a significant competitive advantage, after fees, over firms that
charge 2% of AUM and 20% of the profits.
2.
We are driven by performance, not performance fees. Since we do not charge a performance fee, we do not feel
the pressure to make investment decisions based on how it will impact our firm’s performance fee for the current
fiscal year.
3.
Our focused portfolio of 10-20 holdings will generate returns very different than that of the S&P 500, which is
composed of 500 different stocks. Actively managed mutual funds often have over 50 holdings and therefore
returns typically don’t deviate from their index by more than a few percent annually. Low deviation from the
index makes mutual funds unattractive relative to low cost index funds, net of fees and taxes.
4.
We are extremely selective in what we buy and only look for one or two outstanding ideas a year. We believe a
concentrated portfolio reduces our risk of losing money on each holding because we are patient and wait for
investments we believe are “no-brainers”. We believe it is better to put our money into our safest and best 10
ideas, than into our top 50 ideas. We would certainly make frequent mistakes if we had to purchase 50 holdings.
5.
Our investment decision makers do their own research. Many large investment managers allow analysts to
conduct the research and then the manager makes decisions based on analyst recommendations. This sometimes
causes investment decision makers to overlook details in 10-Ks, conference call transcripts, and in the quality and
integrity of management.
6.
Our focus on a holding period of "forever" has significant tax advantages since there is lower annual turnover.
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CONTACT INFORMATION
Forever Investing, LLC
6155 Heisley Road
Mentor, Ohio 44060
Phone: (440) 488-6936
[email protected]
[email protected]
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DISCLOSURES & DISCLAIMERS
This summary does not contain all information that is material to an investment in the Forever Investing Account. An investment in the Account is
speculative and subject to a variety of risks and considerations.
The performance results presented in this summary represent past performance which does not guarantee or necessarily determine future results.
The investment environment and market conditions may be markedly different in the future and investment returns will fluctuate in value. The
performance results presented in this summary were not compiled, reviewed or audited by an independent accountant. Third party information used
in this document has been obtained from various sources considered to be reliable. However, Forever Investing cannot guarantee its accuracy or
completeness and thus does not accept liability therefor.
This document is confidential and is intended solely for the information of the person to which it has been delivered by Forever Investing and may
not be reproduced or distributed without our express written consent. This document may contain material non-public information and should not
be con-strued as investment advice or a recommendation to purchase or sell any particular security. Information contained in this document is
accurate only as of its date, regardless of the time of delivery or of any investment, and does not purport to be complete, nor do we undertake any duty
to update the information set forth herein.
Investors should have financial ability and willingness to accept the financial and risk characteristics of an investment in the Forever Investing
Account. An investor should review the Investment Advisor Agreement, conduct such investigations as it deems necessary or appropriate and consult
its own legal, accounting, tax and other advisors in order to make an independent determination of the suitability and consequences of an investment.
Performance of investments may be volatile, and Fund investors may experience results that differ materially from those shown. Investors may lose
all or a substantial portion of their investment in the Account.
In addition, some of the information in this document may constitute forward-looking statements and are based on Forever Investing current beliefs,
assumptions and expectations but actual results may differ materially as a result of a number of factors, including those described in this
document and the Investment Advisor Agreement. The strategies described in these materials are subject to various other risk factors and conflicts
of interest. For further information regarding risk factors and potential conflicts of interest, please refer to the Investment Advisor Agreement.
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