Investment Philosophy

Investing is hard.

 

Every investor is different and no formula works for everyone, but we’ve found an approach that works for us.  It can be boiled down to: buy right and hold on.

 

It’s a deceptively simple formula with two components, and both are hard to execute right.

 

Buy Right

The first component, buy right, is the hardest.  It is purposely vague because “buying right” can mean a lot of things, but it highlights the fact that in any investment, the money is made when you buy, not when you sell.  In other words, what you buy and at what price determines 90% of the outcome of any investment.

 

What you buy

Buying right means buying a quality asset.  In the case of equity investments, quality means a business that solves a meaningful and enduring problem for its customers, that earns a decent, long-term return on invested capital, that generates ample cash flow and that’s managed by honest, hard-working and talented people.  Easy to describe; hard to find.

 

At what price

Buying right also means, crucially, paying the right price.

 

Deciding what the right price is for a quality assets is not a science, so we aim to pay a price that’s good enough.  That generally means aiming for stock returns that are greater than or equal to the returns earned by the business.  The only way to do this is through discipline and having a wide margin of safety.  If you pay too high a premium for a stake in a company that consistently earns above-average returns on capital, you are unlikely to earn such a rate on your investment.  Price disciple es crucial.

 

Hold On

The second component of the investment formula is holding on for the long term.  If you acquired a good asset at a reasonable price, you must give it time to play off.  Patience is key.

 

Compounding is powerful concept.  If you look at a graph of a compounding function, you’ll notice that the vast majority of the growth occurs in the later periods.  If you want to benefit from compounding, you must hold on for the long term.

 

Most people interpret this to mean “buy-and-forget”.  To us, it’s more like “buy-and-verify”.  We monitor out investments and constantly check our investment thesis, knowing full well that our thesis will not play out exactly as planned or exactly on schedule.  

 

Holding on to investments through thick and thin is easier said than done.  It’s not easy to make a rational decision when an holding is down 40% or more.  It requires deep knowledge about the underlying investment, discipline and fortitude.  Everybody likes to say that they never sell simply because the price of their investment fell, but everyone is tested, and tempted, when a severe draw down occurs.

 

Every past decline looks like an opportunity, every future decline looks like a risk.

                                                                       -- Morgan Housel

 

One advantage that we have is that we are a private investment company.  We are not a fund that must return capital to investors within a given timeframe or that is under pressure to perform in short term windows to avoid redemptions.  We can ride out the periods of investment underperformance if the underlying business is performing.

 

We apply this approach to all the investments we make, wether its debt or equity, public or private, real estate or another asset.  We’ve found that sticking to this approach gives us the greatest chance of success.