Why Are We Different?
The great 19th century mathematician Carl Jacobi was fond of saying that when you encounter a tough problem, “Invert, always invert.” This idea is clearly applicable to investing. In an effort to avoid our “fair share of folly” we often reflect as much on what we should not be doing as much as we think about what we should be doing. In a crowded world of investment options, we think this discipline allows us to avoid the herd and do things differently:
What We Are:
- We are focused on the long-term. Our time horizon is decades instead of days or months.
- We believe that risk is the probability that a business performs materially worse than we predict, leading to a permanent loss of capital rather than a temporary decrease in the quoted price of a stock (which can often be an opportune time to buy).
- We focus intently on what we know and don’t know and think often about how to manage/avoid the common errors of psychological misjudgment. Being disciplined enough to stay within our circle of competence is critical to our success.
- We build our advantage in understanding a business from the bottom-up by doing our own in-depth, “on the ground” research all over the world.
- We determine the optimal size of our positions not only by the expected return but also by the range of potential outcomes. Estimating the range of outcomes is essential to intelligent investing.
- We want the managers of our companies focused everyday on improving their competitive advantages. We want them digging their moats deeper and wider rather than focusing on gaming next quarter’s earnings or other irrelevant or counterproductive metrics.
- We are more than willing to hold cash in the absence of attractive equity investments that have an appropriate margin of safety. Rather, we feel it is our obligation to do nothing when compelling opportunities do not exist.
What We Are NOT:
- We are not closet indexers and instead prefer to invest our capital only in our best ideas. A portfolio designed to diverge only slightly from a benchmark guarantees mediocre results.
- We do not artificially constrain ourselves by style boxes or other arbitrary factors. Instead, we are opportunistic. We will go anywhere we can find value across geographic regions, industry sectors, and market capitalizations.
- We do not outsource research. Our portfolio managers read the primary source material like 10K’s and trade journals instead of assigning the task to a team of analysts. You never know what someone else is missing or fails to tell you, making it impossible to make good, well-rounded investment decisions without this primary knowledge base.
- We do not use leverage. Leverage is a two-edged sword and can prevent an investor from capitalizing on price disruptions by turning temporary price declines into permanent impairments of capital. In fact, the long-run expected return on a levered portfolio is -100%.
- We do not invest with external managers. We choose to invest substantially all of our investable net worth alongside our investors to best align our interests with their goals.
- We never feel pressured to make an investment and insist on a margin of safety in the hope of avoiding permanent losses of capital.