How We Think
These topics, which are largely excerpted from client letters dating back to our 2001 inception, provide insight into our philosophy and the key tenets that have consistently underpinned our investment approach, which has remained unchanged since our founding. These ideas and concepts are not all-encompassing but do provide a sense of “how we think” and our application of our investing philosophy.
Topic: Price
We value a business by projecting its future cash flows and discounting these “owner earnings” into present value dollars. We will invest in a company only if it is trading at a significant discount to this conservative estimate of intrinsic value, which serves to both prevent permanent capital loss when we make mistakes and also provide outsized returns when we are correct.
Competitive Advantages, Growth, Economic Resilience, and Strong Balance Sheets
We have written in the past about how we consider the relationship between price paid for and expected returns from an investment to be a “law” of investing: the higher the price one pays for a stock, the lower long-term…
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Where We Are Looking For Value
Previously, we shared the year-to-date results for several international indices and discussed how short-term volatility creates opportunities that we work to exploit. Longer-term returns for this group of indices are even more interesting. This chart shows their performance against the…
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Undiscovered and Unloved
The stock market is generally efficient, and the prices of individual stocks trend towards the underlying intrinsic values of their respective businesses. As value investors, we rely on this efficiency – we expect that temporarily mispriced businesses will eventually be…
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Increasing Our Odds
As the new Lindley investment reflects, our mandate (i) is focused on finding attractive investments one-by-one and (ii) affords us the flexibility to invest capital only when we think an investment is truly compelling on an absolute basis. We assess…
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Recency Bias, Global Interest Rates, and Return Expectations
Evolution has rewarded humans (and animals in general) for recency bias. For example, if one of our ancestors found food down a certain path one day, that was probably a good place for him to look again the next day. …
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Price Matters
The math of investing is not difficult and can be done with a little division and some basic algebra, but the math is essential. Buying and selling securities without a fluent understanding of how intrinsic value is calculated is mere…
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Determining Intrinsic Value
We have written extensively in the past about the centrality of intrinsic value in our investment process. A company’s stock price can sometimes diverge widely from its intrinsic value, which Ben Graham explained thusly, “In the short run, the market…
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What to Build (or Buy) in Today’s Opportunity Set
Capital Investment Decisions: When making the decision to prospect for oil by drilling a well, one must estimate the likely cost of extracting the oil and compare that to one’s expectation of the market price of oil over the useful…
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Overpriced Markets
In his January 1962 letter to his partners, Warren Buffett wrote, “I have consistently told partners that it is my expectation and hope (it’s always hard to tell which is which) that we will do relatively well compared to the…
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The Importance of Price
One of our four guiding principles of investing is to be disciplined about the price we pay for any security. Our circle of competence includes many businesses that possess attractive durable competitive advantages and that are run by capable management. …
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When “Mr. Market” Frets, Opportunity Knocks
Diligence when adding new capital is imperative to ensure that existing partners are not diluted out of sizable positions in businesses that we currently own. We have been quite fortunate to acquire new positions and to add to most of…
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Margin of Safety
We are actively looking for more investments that meet our qualitative criteria of good businesses with a sustainable competitive advantage and with talented, honest management. If these qualitative criteria were our only concern, we would have dozens of qualifying investment…
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