We seek to buy competitively entrenched, well-managed businesses trading at deeply discounted prices in the public markets to generate superior long-term absolute returns and minimize the risk of permanent capital loss.
Our Investment Beliefs
- Our in-depth, conservative business appraisals underpin all decisions.
- Long-term horizon provides us with "time horizon arbitrage" opportunities.
- Volatility offers us opportunity.
- Margin of safety determines entry and exit limits.
- "Cheap" is not enough – we want sustainable competitive advantages and value growth.
- Our corporate management partners greatly impact our outcome.
- Concentrated portfolios in our 18-22 best investments adequately diversify, reduce risk, and improve return.
- Build bottom-up, benchmark-agnostic portfolios to own the highest quality, most discounted businesses.
Security Selection Criteria
P/V = 60% or less where intrinsic value is determined by:
Security Sell Criteria
Long-term investment horizon, multi-year holding periods, low turnover. Sell when:
- Price approaches current appraisal
- Risk/Return profile can be improved substantially
- Business' earnings power is permanently impaired
- Management proves incapable of building value and replacing leadership is not feasible
Buying with Large Margin of Safety
A significant discount between a stock’s price and its intrinsic value (P/V) should provide a margin of safety that helps protect capital from significant loss while giving us the potential to generate substantial returns.
The chart below illustrates the concept. We buy a business at $20/share, which is 50% of its $40 appraised value. Because it is a superior business with skilled management, our appraisal increases at 12% per year through cash earnings growth and free cash flow reinvestment. If the stock price reaches value after five years, we will have earned 29% per year. As the table shows, a higher P/V paid for a stock means a lower return.
In this illustration, which does not reflect performance of any particular security, an investment purchased at $20 and sold at $70 in five years creates a 29% CAGR. This assumes that 12% comes from the business’ value growth, and 17% comes from the stock moving from half of value at the outset to full value in five years. Actual investment performance and returns are not guaranteed.
|P/V at Purchase||5 Year CAGR|
These charts do not reflect the performance of any particular security.
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