Four key principles guide PRIMECAP Management Company's approach to investment selection: commitment to fundamental research, long-term investment horizon, emphasis on individual decision-making, and focus on value.
First, PRIMECAP Management Company is committed to fundamental research. The primary objective of its research is to develop opinions independent of Wall Street and to understand the companies it follows as well as any industry analyst. The firm looks for stocks where it believes the underlying company's long-term fundamentals will evolve significantly better than the current Wall Street consensus or valuation suggests. This can be a function of greater expectations it has for new products, new markets, new management, restructuring, a structural shift in demand or supply, or other changes in industry dynamics. The firm's research involves interacting directly with the companies it is reviewing as well as their competitors, suppliers, and customers.
Second, PRIMECAP Management Company takes a long-term perspective. The firm looks for stocks that it believes will outperform the market over a three- to five-year time horizon. Portfolio managers strive to recognize values early and patiently wait for the market to reach a similar conclusion. Often, the search begins with companies and industries that are currently out of favor among investors. Consequently, PRIMECAP Management Company's investment ideas are frequently early. However, if the firm believes that the long-term thesis is intact, conviction derived through its research efforts gives portfolio managers the fortitude to stay the course when the near-term fundamentals are challenging.
Third, PRIMECAP Management Company emphasizes individual decision-making. The firm shuns "group think" and committees whenever possible and relies on individual decision-making in its investment process. The firm believes that individuals, not committees, generate the best investment ideas.
Fourth, PRIMECAP Management Company believes the key to successful investment decisions rests in correctly appraising the relationship between the fundamental value of a company and the market price of its stock. In its judgment, a stock has the potential to be a good investment only if it is purchased at the right price.