As such, CastlePoint limits portfolio holdings to a more manageable level of about 30 securities. This allows us to conduct thorough due diligence and scrutinize each investment while also offering sufficient portfolio diversification.

As shown in the chart below, the largest decrease in portfolio risk occurs where the lines are steepest. Once this inflection point is passed and the curves flatten, the incremental benefit of adding more stocks to the portfolio increase, but at a significantly declining rate.

Investing for the Long-term

• Purchase securities with a view to holding for the long term with annual portfolio turnover averaging roughly 25% or less. Furthermore, low portfolio turnover minimizes transaction costs and taxes (when applicable), thereby increasing portfolio investment returns.
• Additionally, a focus on the long-term does not create the compulsion to “do something” in periods of short-term volatility (other than look for exceptional buying opportunities).

Dilution from Owning Mediocre Stocks 

Owning additional securities in a portfolio solely for the sake of diversification is short-sighted, at best. Furthermore, making purchases of this nature typically increases the risk of a poor investment decision thereby mitigating, at least partially, the benefits of owning a portfolio of truly exceptional companies. Failing to adhere to a proven investment process – and buying securities that do not withstand the scrutiny of that process – is an almost certain recipe for mediocre investment returns at best and more likely a significant loss of capital. 

Additionally, there are numerous studies from the academic community and practitioner’s alike that refute the notion one must own 75 securities (or the mutual fund average of 172 holdings) to be adequately diversified

Perhaps Warren Buffett explained it best: “Wide diversification is only required when investors do not understand what they are doing.”

Through extensive and time-intensive investment research and analysis combined with CastlePoint’s intense focus on security selection results in a portfolio of about 30 stocks.

A fund’s investment returns cannot surpass the benchmark if it highly resembles or owns a vast majority of the securities in the index. As such, independent research and analysis is at the core of each investment decision at CastlePoint: thoroughly understanding the reasons for buying and continuing to own a stock provides the insight necessary for understanding when to sell it. 

The presence or absence of a company presence in an index is irrelevant in CastlePoint’s decision-making process, which general results in portfolios with a tracking error about 3% to 5%

Market Overreaction & Behavioral Finance

CastlePoint’s investment philosophy is based on investors’ tendency to commit cognitive such as Representativeness, Availability, and Anchoring as defined below. These mistakes cause the market price of a company to fluctuate far more widely than its underlying fundamentals, which tend to change gradually over time. 

Behavioral finance is the study of how the psychology of investors’ behavior and the subsequent impact on the market. In addition to the overreaction hypothesis, it includes how people make judgments under uncertainty. For example:

• Representativeness: Investor’s tend to associate a ‘good’ company as a “good” investment; likewise, a ‘bad’ company (e.g., British Petroleum due to the oil spill into the Gulf of Mexico) must be a poor investment. These associations are typically made without regard to valuation
• Availability: When investors are asked the assess the probability of an exogenous event occurring they heavily rely on recent, readily available information rather than more comprehensive and objective data requiring research and analysis. 
• Anchoring: When making predictions, such as the future price of a stock, investors tend to base their estimate on the current price. Whether the price appropriately reflects the inherent value of shares is not considered. Perhaps the most common example of this is an investor’s desire to not take a loss but rather hold onto a stock until it reaches its purchase price to break-even, regardless of the companies underlying value that may have materially deteriorated.

Disciplined, Repeatable and Consistent Process

CastlePoint successfully employs the same time-tested investment approach used for over two decades creating portfolio that outperform the index with less than market risk with relatively high consistency. Over the years after extensive empirical research and analysis, several elements of the investment model used to screen prospective additions were meticulously reevaluated and fine-tuned to insure continued excellent results. Nevertheless. the core investment approach and philosophy remain unchanged. The firm manages investment portfolios from two satellite offices, one in the San Francisco Bay Area and the other in Atlanta, GA. CastlePoint, with fewer than $10 million in assets, is an independent advisor currently exempt from SEC and State regulatory reporting requirements