Investment Process and Philosophy

Our paramount objective at Hofkin Capital is to maximize gains in bull markets within the framework of safeguarding investor capital during bear markets.

Bottom-Up and Top-Down

Our investment strategy is built upon a dual bottom-up and top-down process. As an equity-oriented firm, we pick individual stocks based on bottom-up analysis of company fundamentals. We focus primarily on domestic names but have no bias with respect to large vs. small cap or growth vs. value stocks. We are investors rather than traders, so we look to hold positions for the long term; we’ve owned some stocks in our current portfolios for more than ten years.

At the same time, we overlay our selection of individual stocks with top-down evaluation of the global and domestic economy and financial markets. The decisions we make based on this analysis are the most important part of our investment process and what most differentiate us from other managers.

A Flexible Approach

Unlike the vast majority of equity shops and nearly all equity mutual funds, we will periodically make major moves into and out of both particular sectors and industries and the stock market as a whole. Our willingness to stand out from the herd of other portfolio managers in this respect is the hallmark of our investment philosophy.

Whereas many investment managers are in reality “closet indexers” who purport to manage their portfolios actively but in fact maintain weightings very close to those of their preferred benchmarks, our mix of stocks almost always departs dramatically from the composition of the S&P 500. We prefer to concentrate in areas of the market we find attractive at a given point in time and to avoid entirely those we find unattractive. We view our portfolios as a completely flexible pool of capital and have no formulas or target weightings whatsoever. Thus, our clients are not investing in the stock market per se, but rather in our ability to utilize the market as a tool to meet their objectives.

What Makes Us Different: Protecting Capital in Bear Markets

What most distinguishes us from the great bulk of equity-oriented firms, though, is our readiness to take a stand against the entire stock market when we feel circumstances warrant. We may do so as seldom as once or twice per decade – but when we suspect conditions are ripe for a bona fide bear market, we will reduce our exposure to the market to near zero. (To be clear, we undertake this kind of wholesale repositioning only at what we believe to be major market turning points – the transitions from bull to bear markets and vice versa – and not to sidestep corrections or other more quotidian market movements, which are far more difficult and far less rewarding to try to time.)

Avoiding bear markets while also looking to participate fully in bull markets is no easy objective, which is partly why the great majority of equity managers don’t even attempt it. That is not the whole reason, however. It required no great investing mind to diagnose the dot-com bubble, for instance, yet only a small fraction of managers took any real measures to evade the 2000 tech crash and ensuing bear market – likely for fear of sticking their necks out, being wrong and underperforming, and thereby losing accounts. Indeed, far too many portfolio managers eschew such large-scale repositioning in large part, we suspect, because they are risk-averse on behalf of their own businesses rather than their clients’ money.

But determining when and to what degree to be in the market in the first place is the single most critical decision an equity investor has to make, and we believe that it is part of our fiduciary duty to our clients to make it. Moreover, it is not by dramatically outperforming the indexes in good markets, in our view, but rather by averting significant losses of capital during severe downturns, that the best managers earn market-beating returns for their investors over the long run – and that is how we have compiled our own performance record.