Principles

Our Treatise

We believe that capital has a useful role in society. Property ownership has proven over the course of human history to produce maximum gains for standards of living; moreover, healthy, market-oriented, capital-building economies have provided the stablest foundation for peaceful human relations. As capital allocators, we believe in the role of the owner. The owner is the one ultimately responsible for the shepherding of the assets of the business. In good times, he prospers and shares the gains with his partners, be they fellow owners or labor. In bad times, he stands strong, protects as best he can, and positions for the better days. The owner matters to the system; it is a position of high responsibility.

We invest as owner fiduciaries. We are looking to own, always; never to just bet a horse-race. This is responsible for both our clients and the greater world we are seeking to serve. Capital has a role as stated; it is not to gamble. But, we are also fiduciaries and will sell when it is advantageous to do so, based on rational approximations of asset value.

For our clients, we seek to grow their capital materially better than they can do by themselves, assuming they pursued the sensible, passive alternative. With increased capital, our clients – good people all – can go out in the world and do more good. In this way, with a virtuous circle of “goodness” working, all who touch these efforts will be made better.

Our Process

The following highlights the basics behind our investment decisionmaking:

  1. Source of ideas: bottom-up built database of approximately three hundred companies with attractive purchase valuations attached. The database has been built over the past decade by perusing thousands of publicly-traded company reports and financials; the 300 remaindermen are those companies that, at a price, we would consider owning.
  2. The qualitative aspect: a checklist of economic factors that we call our Ten Commandments. These factors include a thorough understanding of the business built on independent, factual thinking; a belief that the basic economics of the business provide for a reasonable estimation of sustainable profits; a belief that the profit stream will be higher in five years time; trust that the management of the business will serve as shepherds of capital; and a gut-check that, should the price decline, there is enough conviction to increase ownership.
  3. The quantitative aspect: purchase at a reasonable multiple of current earnings, earnings over the previous three years, and the expected earnings over the next three to five years. In special situations, conversion of a company’s assets to higher uses, including liquidation, can provide a basis of valuation. We seek 15+% annual returns for our investments, based on reasonable achievements of business results and valuation levels.

  4. Sell discipline: sell when any one of four estimations occurs – a mistake is realized to have been made with regard to the understanding of a business and/or its prospects, the long-term fundamentals of the industry have changed significantly for the worse (a good example would be newspapers), management becomes substantially less shareholder-oriented, or a substantially better opportunity is discovered, including an investment in the default position (see #7 below).
  5. Portfolio Management: target to maintain a range of 70-90% of invested monies in long-term ownership positions of companies with sizable competitive positions and earnings prospects (Peter Lynch’s stalwarts); position sizes array from 4-10% of the portfolio. Complement these core holdings with smaller positions (3-5% of portfolio) in a group of companies that, although their competitive position may not qualify them for the core, are purchasable at such substantial discounts to reasonable valuations that investments are warranted; maintain these special situations, as a group, to a targeted 10-30% of invested monies.
  6. Monitoring: in keeping with our treatise to invest and behave like owner fiduciaries, our monitoring focus is on the economic performance of our businesses, achieved mainly through a careful read of quarterly profit reports. On the portfolio level, we employ what we term “alternative performance measurements” (alternative to standard gain/loss or “how much is the portfolio up or down” measurements, which we believe to be useful only over long time periods). These measures include quarterly monitoring of our companies “look-through earnings” to create a price-to-earnings multiple for the entire portfolio, monthly monitoring of portfolio turnover to check that our psychology is not drifting away from the ownership principle, monthly monitoring of concentration levels to ensure our best ideas are represented appropriately and that we are not over-diversified, and more-than-monthly monitoring and updating of target security and (when appropriate) industry allocation ranges to ensure our investments are matched with our beliefs of the opportunity set.
  7. The default: at those times when there are not enough investments that meet the criteria articulated above, maintain excess capital in the custodian’s US government securities money-market fund.

Our Constraints and Guideposts

  • No shorting: goes against our belief in ownership
  • No derivatives: time constraints poison the patience required for our strategy
  • Invest to own: target annual portfolio turnover at between 20% and 50%
  • Stick with the discipline: valuable assets, good people, price matters
  • Always be an analyst: dig into the details behind every security and stay curious
  • Always be learning: a little (or a lot) every single day

Our Results

For compliance purposes, we do not publish our results on the website. Please feel free to contact us directly for this data.