“Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical things, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables.” Charles T. Munger
With our investment philosophy of value investing anchored to our core investment principles we turn our attention to maintaining a disciplined approach to evaluating investment opportunities. The core features of our investment process are listed below.
1. Circles of Competence:
In the investment business, it is important to remember that acknowledging what you do not know is a sign of both intellectual humility and wisdom. We focus on sectors and businesses we believe we have a high degree of competence in, which allows us to truly understand the most important aspects of each investment.
2. Independent Thinking:
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” Benjamin Graham
We focus on the medium to long-term issues that matter and try to reject the short-term noise. This requires us to be patience and, when the time is right, to act with decisiveness. Opportunity meeting the prepared mind; is our business!
3. Evaluation of Risk:
All investments begin by measuring risk, especially reputational and regulatory risks. Strong brand equity in the business, reputation and integrity are the most valuable of assets and can be lost in a heartbeat.
Other key risks that are often overlooked include inflation and interest rate risks. Strong businesses with powerful balance sheets that provide essential products and services are better equipped to survive inflationary periods. They are able to re-price their products in periods characterized by rising interest rates and by controlling their debt levels and generating free cash flow.
4. Operates in an industry with above-average growth:
We prefer to invest in businesses that are primarily driven by organic growth rather than growth by acquisitions. It is important that the barriers of entry into the industry are high, making it more difficult for new entrants.
5. High and consistent returns on capital:
Some industries and businesses are much more consistent in generating above average returns. We have little interest in any business that cannot generate, through a full business cycle, a high rate of return on the capital invested in the business.
6. Positive operating leverage, but low financial leverage:
Although debt can be used wisely, over time most individuals, companies and governments abuse debt and over leverage themselves, their businesses or economies. We invest in securities and economies that are more disciplined with their use of debt. Financial flexibility rooted in a strong balance sheet and conservative accounting policies are the foundation upon which wealth is created and sustained over time.
7. Prefer a simple underlying business over a complex business:
Don’t overlook the obvious by drowning in minutiae. “Simplicity is the end result of long, hard work, not the starting point.” Frederick Maitland
8. Remember that compound interest is the eighth wonder of the world (Einstein), never interrupt it unnecessarily.
“Money can beget money, and its offspring can beget more.” Benjamin Franklin
Upon drawing these items together, the most important ingredient becomes discipline and patience. One person stated that patience is the art of waiting without tiring of waiting. Another investor stated that the big money is not in the buying and selling… but in the waiting. Warren Buffett has made the point over and over again, that he didn’t get to where he is by going after mediocre opportunities, but by waiting for the fat pitch!