Our investment process starts with a research-intensive approach to identify well-managed companies in good or improving businesses which are significantly undervalued. Since we think management makes a big difference in company performance, we spend a lot of time analyzing the quality of management; asking such questions as whether a team has effectively deployed capital, whether it is shareholder oriented, and whether its long-term strategies are well-articulated and sensible.
Even the best managers, however, cannot overcome deteriorating fundamentals. Finding companies with good businesses is at least as important as identifying those that are well managed. Among other things, a good business should require little capital to grow, possess enduring competitive advantages, have a leading position in an industry with rational competitors, generate attractive economics (such as high return on capital and profit margins) and be understandable – both to the managers running the business and to us as investors.
Through patience and discipline it is possible to buy good businesses at an attractive price. Perhaps this price discount is created by a market sell-off; or because investors place too much weight on near-term operating trends. Since we focus on the long-term value of a company, we relish the opportunity to buy stocks that have declined substantially below this value due to short-term fluctuations.
Managing risk is an important part of our investment strategy. We attempt to minimize downside by purchasing equities at a significant discount to our estimate of underlying value. We tend to buy businesses that are easy to understand and strive to have deep knowledge of what we own, which helps us understand the downside risk associated with each of our investments. By selling securities which have become fully valued, trimming outsized positions, and adding to securities deemed undervalued we hope to avoid large exposures to stocks that have performed exceptionally well and are ripe for a correction.