We believe value resides in a business not in its stock, that short-term valuations can discount long-term potential, and that volatility can create opportunity. Our investment approach is based on asking and answering a single question: If a private business approached us and asked us to partner with them, would we buy in?
To answer this, we strive to understand what our ownership share is actually worth and what management is going to do to grow it. We are investors, not traders. So we want to invest in companies that manage capital from the perspective of owners, not from the perspective of Wall Street and stock prices.
Our approach emphasizes stock selection over market exposure, with a strong preference for conservative companies to help mitigate stock specific risk. Since we are the largest investor in our fund, we are keenly focused on capital preservation and total return, and we make no attempt to forecast financial market trends.
We do not look for “value stocks”, but instead seek out good companies that are out of favor today so we can take advantage when the market reacts to something that is unrelated to the long-term success of the firm. We believe this comes from thoroughly analyzing companies to find good businesses with strong fundamentals.
Our low turnover approach with a limited number of holdings may be well suited for pairing with other managers who focus on capturing beta, and the full market swings those frequently entail.
Our investment process is designed specifically for finding companies that are good stewards of capital and make capital allocation decisions focused on compounding shareholder value, that manage conservative balance sheets with little-to-no leverage, and that deliver solid historical dividend yields.
Our approach starts with screening the Large Cap universe to narrow our selection of companies that will undergo a deeper fundamental evaluation. Our process is built to identify companies that are run like private enterprises in three specific categories: Franchise Businesses, Cyclical/Specialty Businesses, and Holding Companies.
We focus on these types of companies because Franchise businesses with high barriers to entry often deliver high returns that consistently compound, Cyclical business’ valuation fluctuations offer good opportunities for investors who understand normalized earnings, and Holding companies are typically made up of multiple diversified revenue generating business lines.
With each of these, we look for skilled management that provides a candid discussion of how they allocate capital and is reflected in compounding share value, with incremental return on capital exceeding their cost of capital.
There are things we know and things we don’t about any given company. Our process helps us separate those two classes of information, so that we can pursue investments in those companies with the fewest unknowns, reducing risk by reducing what we don’t know. We work to manage downside risks by delving into a company’s cash flow, asset values, or other means of valuation based on actual results, with reliance on future projections being the least meaningful metric to consider.