Equities

Rowland Taylor practices a disciplined approach to value-investing with an eye first to the downside.

Public Equity

Competitive Advantages

Small size:

We’re able to analyze and invest in companies often below the size and/or volume threshold that would be material to many institutional investors. We’re able to establish full positions in neglected or under-followed securities.

Long term perspective:

We’re willing to hold investments where significant value realization is more than a year off. We believe that patience can be as important as intellect.

Concentrated portfolio:

We limit our portfolio to 8 to 15 positions, so that we have the focus and flexibility to pursue the most compelling opportunities. Our largest position can be as much as 20% of the total portfolio, and positions of 7% are quite common.

Investment Principles:

  1. Asset value is based upon the future free cash flows generated by a business discounted back at a risk-adjusted rate of investment.
  2. We do not use leverage. Half of achieving victory is avoiding disaster.
  3. We adhere to a real return hurdle on individual securities, and we measure our portfolio performance relative to the S&P 500 on a 2 year running average. Should the market experience a period of extremely high valuation, we may find ourselves largely holding cash or cash equivalents.
  4. A holding period of 3 or more years can offer superior investing opportunities unavailable to other investors. Investors that measure success in quarters or a single year will often be victim to market sentiment and subsequent redemptions – even if an investment’s thesis is still intact.
  5. A “margin of safety” protects against principal loss. A margin of safety is typically found in one of either two forms: asset quality or price. Principal loss is the most damaging investment outcome in building a compounding machine.
  6. We define high quality companies with high quality management as Irreplaceable. Irreplaceable companies increase in value over time, becoming their own catalyst to value realization.
  7. We define risk as the permanent loss of capital. Investment risk is a function of the knowledge of a business, not stock price volatility.
  8. Diversification can decrease exposure to a certain scenario or set of related outcomes. In this manner, it can decrease risk. Diversification can also decrease depth of understanding in individual investments due to sheer number of total investments. In this manner, diversification can actually increase risk. We seek to minimize our risk through moderately diversified but well-understood investments.
  9. Holding a concentrated portfolio (8-15 positions) allows us gain much of the benefit of diversification and enhances our focus, but it comes with additional price volatility.
  10. Portfolio allocation is just as important a skill as security analysis.

investing-portfolio

Macro-economic Context

  1. At a late stage in the long-term credit cycle, politicians will be faced with addressing national debt via three broad choices: austerity, inflation, or default. For democratic nations that can issue debt in their own currency (fiat systems), inflation will be the most politically palatable tax on its citizens.
  2. Current treasury yields are artificially low, and they therefore don’t accurately represent a historical or likely future alternative rate of risk free return.
  3. At best, we expect treasury yields to regress towards the historical mean over the long term future (20+ years). At worst, we expect some degree of creeping inflation as easy money policies throughout the world lead to their likely end.
  4. High free cash flowing companies with limited physical assets and a high degree of pricing power are a terrific inflation hedge.
  5. As fiat money systems are pushed towards excess and “broken” by inflation, commodity money is often reinstated in part or whole. The cycle then continues until commodity money is “broken” in part or whole – typically via deflation.
  6. We don’t invest on macro-economic theses, but we believe context sharpens bottom-up understanding.

Monetary System Cycle

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Private Equity