Our Philosophy
Philosophy is the foundation, process builds the returns, structure tilts the probability of repeated success in our favor
We believe that high quality business with competent management teams can compound intrinsic value at above average rates over very long periods of time. Long-term ownership of their equities, when purchased at a discount, will deliver superior investment returns over time.
Quality (Economic Profits Drive Returns)
Investing in high quality companies will deliver superior investment returns over long periods of time:
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Competitive advantages or economic moats allow companies to create value by compounding the spread between returns and cost of capital
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Capital allocation by company management (funding internal growth, dividends, buybacks or acquisitions) is critical to compounding shareholder value
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A focus on long-term economic profits in board and management is rare, but builds more shareholder value than short-term earnings management
Structure (Conviction Investing)
Investment decisions are probabilistic, structure and every aspect of the process is designed to tilt the odds in investors’ favor:
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Concentration - active investing adds value across all funds (even underperforming ones) when only the best ideas are used as subset portfolios
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Active share and long-term holding (low turnover) combined adds alpha
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Equally weighted portfolios harvest the Fama & French small company factor (our portfolios also benefit from the quality/profitability and value factors)
Style (Business Owner Mindset)
A business owner mindset allows a long-term perspective that reduces behavioral finance mistakes:
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A long-term view lets us to separate signal from noise – focus on the long-term economic profits rather than extrapolating short-term results
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Stocks of high-quality companies (defined by leverage, profit margin, earnings volatility or beta) outperform low quality stocks over the long-term
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Time arbitrage is buying assets with long-term value (probabilistically enhanced by competitive advantages of companies) in a contrarian view to an underappreciating market
Risk Management (Consistent Process Improves Skill)
Risk management is fundamental to and integrated in our process:
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Looking for a margin of safety in investments is built-in risk management by rendering an accurate estimate of the future unnecessary
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Mean reversion or cyclicality in revenue, margins and valuations creates opportunities to create higher investment returns and better protect capital
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Minimizing losses is more important than maximizing gains; a disciplined process and checklist driven decisions minimize mistakes