Market and Performance Summary

For the quarter ended March 31, 2015, the Kovitz Investment Group® (KIG) Equity Composite (the “Composite”) returned 1.4%* net of fees compared to 1.0% for the S&P 500 Index.

As long-term investors, our research process emphasizes the appraisal of factors that we believe matter most to a business’s long-term success. These include the quality of the business, the strength of the balance sheet, the predictability of the cash flows, and the ability of the management team to allocate capital intelligently and judiciously. We believe these attributes are the most reliable predictors of a company’s ability to maximize intrinsic value on a per share basis.

Business quality may mean different things to different investors. When we think about a high quality business, we are referring to a company that not only earns high returns on capital today, but is likely to sustain high returns on capital long into the future due to a strong competitive position. Warren Buffett notably refers to such businesses as possessing a competitive “moat.” Buffett asserts,

“A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns.”

Buffett’s symbolic moat is formed when a business possesses one or more sustainable competitive advantages. The primary competitive advantages that we focus on include a low cost position, strong brand loyalty, high customer switching costs, and network effects.

Kovitz Investment Group: Value of financial asset

As taught in introductory business classes, the value of any financial asset (e.g., stocks) should equal the present value of all of its future cash flows. Therefore, to effectively value a business we have to make a reasonably accurate forecast of that business’s future. Accurately predicting the future cash flow of a business is difficult. Without a moat, it becomes even more difficult because competition can quickly disrupt a business’s sales and margins resulting in diminished cash flow. On the other hand, predictability of cash flow increases if a business has a moat. The wider and more enduring we perceive a business’s moat to be, the more conviction we can have in our intrinsic value estimates.

Assessing and appraising the strength and endurance of competitive advantages is the most difficult task in investing. Most of our mistakes can be traced back to an incorrect assessment of a company’s moat. Given the foundational nature of this exercise in our research process and its critical role in our future success, continual improvement in this area will always be our main focus.

While it is mandatory for a company to possess a defensible moat before the possibility of an investment is considered, the overriding factor for inclusion in our portfolio is price. Regardless of positive qualitative attributes, quantitatively, the company’s stock must trade at a significant discount to our determination of its private market value (intrinsic value) before we will make an investment.

This margin of safety provides further insurance against a permanent loss of capital should our assessment of a company’s moat prove overly optimistic.

Kovitz Investment Group: Performance

Below is our standard performance report for the Kovitz Investment Group Equity Composite, which now encompasses 18 years and 3 months. The chart summarizes both annualized and cumulative performance results from January 1, 1997 through March 31, 2015 for the Composite and the S&P 500. We remind you that your portfolio’s composition is significantly different from the broad market indices, so your performance will inevitably deviate from these indices, especially over shorter time periods. We manage your portfolio for long-term results, and we encourage you to evaluate its performance over a multi-year time frame.

Note that we have added a new metric to the first chart: The percentage of the time we outperform the S&P 500 on a rolling period basis. For example, there have been 208 one-year rolling periods from January 1, 1997 through March 31, 2015 in which we have outperformed our benchmark 60% of the time. Or, that there has been 100 10-year rolling periods in which the Composite has outperformed 93% of the time. The point of detailing this is to remove the vagaries that the selection of any arbitrary end date has on the numbers, and to provide a truer reflection of our longterm performance. As illustrated, the percentage of outperformance increases as the measured time period lengthens, which corroborates our thesis that compounding wealth is a long-term endeavor and not a short-term game.

Kovitz Investment Group

Kovitz Investment Group

See full PDF below.