The three points of our investment philosophy are value, quality companies, and long-term focus.
Value: We believe in the philosophy of investing espoused by Benjamin Graham & David Dodd in their 1934 classic Security Analysis. That philosophy rests on three principles:
1. all securities have an intrinsic value that, although impossible to precisely determine, is imperative to estimate
2. market prices of securities are subject to significant and erratic movements, which often times diverge from the securities’ intrinsic value
3. a “margin of safety” should always be established - a strategy of buying securities only when their market prices are significantly below their estimated intrinsic value
In other words, we are value investors. We always attempt to estimate the intrinsic value of a company and once established, invest when the current market price of the company is well below our value estimate. The key word here is estimate – we are not arrogant investors. We recognize that we can not absolutely say what the exact value of the company is, thus we’ll only invest with a margin of safety established. The margin of safety protects from ourselves and in the long run will benefit us with fewer loses and higher returns.
Quality: Although we describe ourselves as value investors, we are not limited to investing in what are traditionally called “value stocks”. Some value investors may search only for stocks with low price-to-earnings or low price-to-book ratios believing that these ratios accurately measure a company’s intrinsic value. We however believe that these ratios say little about companies' underlying worth and are at best only indicators of value. We try to stay out of this ‘value trap’ by only selecting businesses of the highest quality.
We look for great businesses with leading market share, franchise value, strong niche markets, pricing power and high barriers to entry. Healthy balance sheets, stable and improving margins, and high levels of free cash flow are also priorities. We look for strong management that has an equity stake in the company and that allocates capital prudently. Businesses with these characteristics are able to grow their intrinsic value over time, and these are the companies in which we are interested.
Long-Term Focus: We believe that, over long periods of time, the price of a stock will rise to reflect the value of the underlying company. As the economic value of the company grows, eventually, so will its market price. As Benjamin Graham said, “In the short run the stock market is a voting machine, but in the long it is a weighing machine.” To that end, our view is toward the long term.
Having a long term focus relieves us from the burden of the excessive trading required to chase the hottest stock, sector or trend at the moment. Any frenetic trading strategy with the promise of high returns ever invented has succumbed to the weight of transaction costs and tax consequences. A "buy and hold" strategy necessarily avoids or at least delays these costs and yields the greatest total return over time.
On a related note we, unlike many financial advisors, do not consider short term portfolio volatility the ultimate measure of risk. The day-to-day gyrations of security prices do not concern us per se, especially considering that we invest with the long term in mind. And in reality, when measured over periods of 5 years or more, portfolio volatility is inconsequential. A better definition of risk is the measured probability of loss in spending power. We invest with the intent of increasing our spending power over time. Volatility is of secondary concern to us.
Investment Process: Policy Statement >>