The Glass is Half Full

By Marc Roberts

Investor fear is again being fueled. The root cause of the trepidation is nothing new: European fiscal and sovereign debt concerns, federal government deficit spending, the slow U.S. recovery, and signs of a slowdown in China. These fears can lead to market fluctuations due to the indiscriminate selling of stocks – regardless of a company’s underlying performance. This volatility in stock prices has left many investors unsettled. We define risk as the permanent loss of capital – not price volatility. Price volatility provides us with the opportunity to invest in sound businesses at a discount to our estimate of their intrinsic value. This is especially true in the FAM Small Cap Fund because, in general, small-cap stocks tend to be more volatile than mid- and large-cap stocks.

Since the launch of the FAM Small Cap Fund on March 1, 2012, downside stock price fluctuations have created strong investment prospects. We have used the declines to put more of the portfolio’s cash to work in high-quality companies selling at discounted prices. As a result, you will find that cash has decreased and we believe the Fund’s current equity holdings are well-positioned for the long term. We expect that in the near future we will have the opportunity to put even more cash to work.

Investing at the right price is just one of Fenimore Asset Management’s (the investment advisor to FAM Funds) core investment criteria. What we also like about the stocks in all of our mutual funds are three key characteristics of their underlying businesses: 1) established enterprises that are industry leaders and have a favorable long-term outlook; 2) financial strength with strong free cash flow generation and high returns on invested capital; 3) and experienced, forthright management teams with a history of creating profitability and shareholder value.

It is possible that volatility will continue through 2012 as international economic uncertainty and other fears are prolonged, and as we go through our presidential election process. For value investors like us, price declines present opportunity. At times when “the crowd” sells stocks haphazardly – including those of high-quality, well-managed companies – we are prepared to take advantage of the opportunities that arise and strengthen our mutual funds for the long haul. With the overall stock market trading at valuations below long-term averages, we think portfolios of first-rate stocks can produce solid results over time.

Please see Fenimore disclosure.