Our investment philosophy and approach draw upon our partners’ years of experience managing investments across numerous market environments on an institutional scale and models the successful philosophies, practices and insights of outstanding investors like Warren Buffett, Philip Fisher, Benjamin Graham, Bob Kirby, Peter Lynch and others.
One of our primary goals is to help our clients achieve outstanding long-term investment performance through the application of proven principles based on a sound and timeless investment philosophy. We summarize the main principles of our investment philosophy below:
- Business-like Investing
- Focus on Value Investing
- Focus on Long-term Compounding
- Margin of Safety
- Circle of Competence
- Capital Allocation and Great Businesses
Investing Must Be Business-like and Requires Patience, Discipline and Hard Work
The key to successful long-term investing is to take a very “business-like” approach to making capital commitments. Being business-like means doing your own homework, working hard at your chosen field of activity, thinking for yourself, trying to identify proven methods, and understanding and focusing on the fundamentals that you can control. Successful investing must be seen as a serious endeavor worth pursuing and honing with intensity and consistency over time.
A central tenant of our emphasis on business-like investing is to look at each investment on its merits as if we were looking at the opportunity to buy the entire business or outstanding ownership of the security being evaluated. Our focus on business-like investing leads us to analyze each potential investment in-depth from a qualitative and quantitative basis.
Another byproduct of this approach is that we often view volatility as our friend because it occasionally creates attractive opportunities for investors such as ourselves that are prepared to take a business-like, long-term, and value oriented view towards our investments. This may seem counter-intuitive as most investors experience strong negative emotions associated with periods of market declines but for investors who are net savers, a period of market declines may be a wonderful opportunity to increase long-term wealth.
We Are Value Investors for Whom Price Paid is Important
At the core of our investment philosophy is a belief that a value-based and value-conscious approach to committing capital is a key prerequisite for long-term investment success. Even a great business can sometime be a poor investment if the price paid is too high. Correspondingly, we believe that some of the best investment opportunities are found in areas which are currently overlooked and thereby offer attractive prices and total return potential.
We have found that our emphasis on finding value often leads us to contrarian investments and that attractive investments are often available in places that others may be avoiding or overlooking. As value investors, many of our best opportunities arise when short-term disappointments create an attractive buying opportunity in a business that has long-term merit. However, the values created by negative company, industry, or market issues often take time to be unlocked and realized. Therefore, our value approach requires that we and our clients take a patient, long-term view towards investment success.
We have found that value and overlooked investments appear in a variety of forms. In some cases it can be as straightforward as a company selling below book value or a group of companies selling at low price to book values. In other cases, a superior set of assets or managers may be obscured by other issues impacting the investment. In our dividend strategies, for example, we believe the value lies in the market’s tendency to overlook opportunities in companies with superior and consistent dividend growth prospects.
This orientation towards and emphasis on value investing is not to be confused with an approach that avoids investing in growth companies. Companies that can grow their revenues and earnings and can deliver excellent compounding over time with an acceptable risk profile can still qualify as value investments based on our criteria. In fact, we love to own quality businesses with outstanding growth prospects – as long as we do not have to overpay.
A Long-Term Approach and Emphasis on Patiently Compounding Capital Over Time
We emphasize and focus on the long-term results of our investments. We often think about investment time horizons in rolling five- to ten-year periods of time, though in practice longer or shorter periods will also arise. The reason we emphasize the long-term is because we believe that worthwhile investment success is built over a long-period of steady compounding and is rarely built overnight.
Our approach to investing for the long-term requires patience and discipline from ourselves and our clients to stay the course though the inevitable periods when our approach is temporarily out of favor, prices decline after we invest or other approaches seem momentarily more exciting or rewarding. In our experience, this patience is the cost that investors must be willing to incur to reap the benefits of successful long-term investing. However, the reward of patience is the ability to compound capital at an attractive rate over the long-term through partial ownership of good businesses or investments bought at good prices.
Our patient approach to investing also gives us a performance edge due to the efficiency inherent in our approach from relatively low turnover of securities, low trading costs, and some tax-efficiency as well.
Understanding and Managing Risk Through Margin of Safety
In building our investment portfolios, we look to compound our investors’ and our own capital over time while working to mitigate unnecessary risk. By risk, we mean permanent loss of capital as contrasted with temporary stock market price fluctuations. In this orientation, we are also different than the majority of advisors and individuals. Although volatility is often equated with risk, we believe that volatility can also create opportunities for long-term investors. For example, we are happy to see an increase in intrinsic value accompanied by a short-term price drop in one of our investments, particularly when we can use the opportunity to build a position further.
We do this by emphasizing the crucial distinction between investing and speculating. We have a very limited ability to predict the short-term market fluctuations of securities prices in a 12- or even 24-month period. Short-term prices are driven by a number of factors that are difficult to predict, including investor psychology and supply and demand. Consequently, we try to knowingly avoid speculation, such as purchasing, selling or avoiding securities based on guesses regarding near-term price expectations.
Identifying and understanding the margin of safety in any investment also serves an important role in longer-term risk mitigation. In our view, a margin of safety comes mainly from the discount between the price we pay and the value that we see in a particular investment. The greater the margin of safety, the more it gives us a chance to preserve capital over time because it provides protection against a degree of adverse activity before the value would be eroded down to the discounted price that we would have paid. This focus on margin of safety is a conscious effort to reduce the risks associated with our investments over the long-term.
Limiting Our Investments to Our Circle of Competence
Part of having an edge is having a superior ability to understand and identify both opportunities and pitfalls associated with a given business. However, investing is a competitive activity and competition has a tendency to reduce the profitability of any edge over time. One important bedrock principle we emphasize is to limit our investments and activities to areas within the investment universe which we think we can understand, a concept referred to at sticking to our own circle of competence.
While this may seem obvious and easy to do, it is not necessarily so. Following this principle requires us to think about and be objective about the boundaries of our capabilities and areas of familiarity. In addition, we need to have the willingness to say no on a regular basis to opportunities outside this circle of competence that may seem compelling but are nevertheless outside of our areas of core competence.
Fortunately, in investing, its not so important that you have the largest, or even a particularly large circle of competence, but it is critical that you know and stick to the boundaries of your own particular areas of understanding because no matter the size of your circle, it is usually possible if you are patient and decisive to find at least a handful of worthwhile investment opportunities that can compound our capital at attractive rates over time.
An Emphasis on People, Culture, Capital Allocation, and Great Businesses
As captured in the concept of “The Art of Intelligent Investing” from our firm logo, we believe there is much more to investing that just the numbers associated with a given opportunity. In fact, historical numbers are only relevant to the extent that they foreshadow what is yet to come. At least as important is an understanding of the qualitative factors and policies that will create the future financial performance that will drive our investment results in the future. The qualitative factors include such things as the nature of the business and culture of the company, the quality and character of the people managing the business, and the capital allocation policies that they are likely to implement in the future.
We often view consistent and growing dividends and intelligently executed buybacks as a sign of a healthy business. While we do not limit our focus to companies that pay a dividend or complete share buybacks, those that do merit significant attention. Dividends and share buybacks can be indicators of above average capital allocation policies, which is particularly important for our dividend-related investment strategies.
Only a subset of the broader market of companies pay a dividend and/or repurchase meaningful amounts of their outstanding shares in a value-added manner. We believe there is good reason for this, as only certain business models can maintain growing dividends and/or buybacks over time. By intelligently returning capital to their owners, these companies can be some of the best long-term investments for their owners. In addition, we have found that the management and boards of companies with superior capital allocation policies create greater performance and value for shareholders in a number of other ways as well.
Within the investment opportunities we identify, we often emphasize those with outstanding business models. We have found that outstanding businesses and investments often share a number of characteristics. We have a disciplined approach that seeks to identify these exceptional businesses and investment opportunities. We will look to invest in them if the price is right. However, good ideas are valuable and scarce. It takes time and effort to find and qualify outstanding businesses and investments. On one point we are clear – we would rather be patient than to make an investment that does not meet our criteria.