How We Think

Expanding Our Geographic Circle of Competence

Your managers have just returned from an extended trip to Argentina and Chile to research divisions of businesses in which we currently own stakes as well as to broaden our circle of competence. We spent several days in Buenos Aires, Argentina followed by a driving trip through much of northern and central Argentina. We then flew to Santiago, Chile from Cordoba, Argentina for meetings and drove on to southern Chile. Some of our Mexican and South American investments are consumer products businesses, and we know of no substitute for shoe leather and tire rubber for seeing how the businesses are really performing compared both to their potential as well as to their competitors. We love making hundreds of market visits to judge presentation, pricing, execution, marketing, distribution, competition, etc.

We were able to spend a great deal of quality time with many levels of management in one of our core holdings and to get a much better understanding of what is actually happening on the ground.  This company’s management is doing a terrific job in their execution.  The people at a variety of levels in the organization are very talented and motivated.  We were pleased to see that they were spending all of their time digging the moat around their business deeper and no time maximizing profits for the short-run.  The company is implementing a number of intelligent, high-return capital projects, and we are confident that they will have several more years of easy decisions to make.

We love this kind of business — one that earns high returns on invested capital while presenting management with easy decisions instead of difficult problems.  Hopefully, we will be able to purchase shares at bargain prices for years to come.

On the trip we were also able to prospect a number of potential businesses in both countries.  We believe that we meaningfully enhanced our network of contacts while widening our geographic circle of competence.  While the overall level of these markets may not be cheap currently, particularly in Chile, we need to become prepared for when the markets do become cheap.  Favorable demographics, high savings rates, and low government pension/medical liabilities are just a few of the characteristics that many emerging and recently emerged markets exhibit that will provide helpful tailwinds to investors.  Additionally, we can magnify our informational and decision-making edge in such places because a large percentage of Western managers and investment banks simply refuse to bother with such places.  Many that do invest are not doing the type of on-the-ground work that we think gives us an advantage.  The less sophisticated the market participants and the more difficult the research, the greater the likelihood that we can identify good businesses trading at irrationally low prices.