Ten principles guide our investment philosophy:
1 | We are value investors.
Value investing is identifying companies which are priced at a significant discount to underlying business value. We look for several elements when analyzing investment ideas: (i) current earnings, cash flow and returns-on-capital which are below normal and potential; (ii) a low valuation relative to normal and potential; (iii) a recovery trajectory that is realistic and likely; (iv) transformative events, either in industry structure/competitiveness or management change, which will improve a company's ability to earn above its cost of capital; and (v) a "margin of safety" or downside protection, provided by the balance sheet, fixed assets, intangibles or other factors.
2 | We have contrarian sensibilities.
A willingness to "lean into the wind" often delivers substantial reward relative to risk. We work hard to understand both the conventional and unconventional point of view.
3 | Rigorous fundamental research makes a difference.
Our investment ideas are driven by rigorous fundamental research of companies. We use financial analysis, interviews with company management, competitors, customers/suppliers, and regulators, and proprietary surveys and quantitative data analysis as our key tools. Although we invest primarily in equities, we analyze the debt and other parts of the capital structure to better inform our point of view.
4 | Competitive advantage is achieved through better information and better judgment.
Better information flows from exhaustive, original, leave-no-stone-unturned research and analysis; better judgment is the result of cumulative investing experience that, itself, is often the product of mistakes made and lessons learned and successes kept in proper perspective.
5 | Our investment horizon is long-term.
We are willing to ride out near-term volatility when we believe our investors will be compensated with better returns in the long-term. Good investment ideas often require patience. While it is seductive to take comfort in the certainty of the present, we work hard to remain forward-looking. We want to skate to where the puck is going, not to where it is.
6 | Risk is defined not as beta or volatility, but rather the likelihood of losing money.
We perform a liquidation analysis on all companies held in the portfolio to help us better understand and mitigate risk.
7 | Dividends matter.
We favor capital-generative businesses and management that is appropriately balancing the needs for reinvestment with capital repatriation to shareholders. We pay close attention to the overall dividend yield on the portfolio, dividend-paying capacity, and forecasted dividend growth and share repurchase potential.
8 | We do not over-diversify.
We believe holding a smaller number of stocks in the portfolio, generally 20-30 companies, is important to our investment philosophy of being focused on the highest conviction ideas. While a focused approach may cause investment results to fluctuate more than that of a comparable diversified fund, we believe long term results benefit.
9 | We believe in significant ownership in the funds we manage.
By investing side-by-side with other shareholders, we remain singularly focused on the mission of producing superior investment results.
10 | Value-investing does not work when investors broadly flee all risk (as they did in 2008).
In the recent financial crisis, many legendary value investors produced disappointing results. Reputations were tarnished and investment credibility questioned. While funds managed by these professional value investors have subsequently recovered—some quite significantly—the experience left a dark cloud over an investment discipline which failed to protect investors from loss. A key lesson learned is the importance of differentiating between a flawed investment approach and the consequences of extreme and pervasive risk aversion, even if the latter occurs for understandable reasons. Value investing appears to "fail" as discrepancies between intrinsic value and current stock prices remain wide until structural appetite for investment risk returns. During such times, the tools of disciplined value investing are never more relevant, yet (ironically) most likely to be abandoned. They highlight opportunity to purchase good businesses run by good management at extraordinarily deep discounts to intrinsic value, creating the potential for significant investment returns in the years ahead.