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Philosophy & Process

Philosophy is the foundation, process builds the returns, structure tilts the probability of repeated success in our favor

Quality

Economic Profits Drive Returns

Investing in high quality companies will deliver superior investment returns over long periods of time:
 

  • Competitive advantages or economic moats allow companies to create value by compounding the spread between returns and cost of capital
     

  • Capital allocation by company management (funding internal growth, dividends, buybacks or acquisitions) is critical to compounding shareholder value
     

  • A focus on long-term economic profits in board and management is rare, but builds more shareholder value than short-term earnings management

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A business owner mindset allows a long-term perspective that reduces behavioral finance mistakes:
 

  • A long-term view lets us to separate signal from noise – focus on the long-term economic profits rather than extrapolating short-term results
     

  • Stocks of high-quality companies (defined by leverage, profit margin, earnings volatility or beta) outperform low quality stocks over the long-term
     

  • Time arbitrage is buying assets with long-term value (probabilistically enhanced by competitive advantages of companies) in a contrarian view to an under-appreciating market

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Business Owner Mindset

Style

Investment decisions are probabilistic, structure and every aspect of the process is designed to tilt the odds in investors’ favor:
 

  • Concentration - active investing adds value across all funds (even underperforming ones) when only the best ideas are used as subset portfolios
     

  • Active share and long-term holding (low turnover) combined adds alpha
     

  • Equally weighted portfolios harvest the Fama & French small company factor (our portfolios also benefit from the quality/profitability and value factors)

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Conviction Investing

Structure

Risk management is fundamental to and integrated in our process:
 

  • Looking for a margin of safety in investments is built-in risk management by rendering an accurate estimate of the future unnecessary
     

  • Mean reversion or cyclicality in revenue, margins and valuations creates opportunities to create higher investment returns and better protect capital
     

  • Minimizing losses is more important than maximizing gains; a disciplined process and checklist driven decisions minimize mistakes

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Consistent Process Improves Skill

Risk Management

Investment Process

Focus on what drives long-term business return

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INDUSTRY

Predictability and long term return

BUSINESS

Sustainable competitive advantage

STRATEGY

Management incentives, strategy and capital allocation

DATA

Qualitative information with long shelf life
that cannot be collected by machines

Assessing

Business Quality

  • Does the company have a proven business model?
     

  • Does the company have a competitive advantage?
     

    • Barriers to entry

    • Pricing power

    • Economies of scale

    • Lower cost and higher demand

    • Habit formation and captive customers

    • Culture
       

  • Does the company reinvest to widen its moat?
     

  • What is the downside risk (survival)?

A consistent and disciplined investment process improves rational decision making

PROCESS

Initial Qualification

GOAL: Create a manageable opportunity set to prioritize and analyze

Historical Analysis

GOAL: Determine initial business quality and investment opportunity; rank candidates

Fundamental Analysis

GOAL: Research industry stability and competitiveness

Portfolio Construction

GOAL: Improve the overall quality and/or valuation of the portfolio; maintain low portfolio turnover

Risk Management

GOAL: Reduce the risk of permanent loss of capital; generate superior risk adjusted returns

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"I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

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- Warren Buffet

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