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.
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.
- Asset value is based upon the future free cash flows generated by a business discounted back at a risk-adjusted rate of investment.
- We do not use leverage. Half of achieving victory is avoiding disaster.
- 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.
- 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.
- 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.
- 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.
- We define risk as the permanent loss of capital. Investment risk is a function of the knowledge of a business, not stock price volatility.
- 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.
- 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.
- Portfolio allocation is just as important a skill as security analysis.