Our Structure and Investment Strategy Offer a Number of Unique Competitive Advantages
WestRock’s organizational structure and investment strategy offer of number of distinct advantages. First and foremost, as a value-oriented risk-focused investor, we adhere to proven strategy that is fundamentally sound approach. Value investing as an investment strategy has a well-documented consistent history of outperformance over many investment cycles and in a variant of market environments. The challenge lies in its disciplined application, not in the investment strategy itself. However, no investment strategy is without risks. The key is in having disciple and patience and most importantly, focusing on investment risk.
Investing requires maintaining a long-term perspective. In the short-term market prices may be highly volatile, but over longer periods of time market prices of securities largely reflect business value. Quarterly returns have little meaning to us when our investment strategy depends on having an investment horizon measured in years not months. Because we understand that market prices do not equal business value, price volatility then works in our favor. This important distinction cannot be understated. Not only does our private structure allow for us maintain this long-term perspective, it also broadens our set of investment opportunities. We are not relegated to a particular industry or market capitalization. We can search for market inefficiencies wherever they may be.
The proper alignment is imperative in investing as it is in business. Partnership isn’t merely a term that defines our corporate structure, it’s an ideology to which everyone associated with WestRock Investments must be committed, at all times. As an example of this alignment, the managers and owners of our partnership have and always will have a large portion of their personal wealth invested with the company so that the results realized by investment decisions are results shared equally by all investors in the partnership. It’s a subtle but important point.
Lastly, partnership means behaving in a manner of integrity and with a sense of responsibility. Partnership means being accessible to investment partners. And partnership also means communicating with openness and honesty at all times, when our investments are performing well, and also when our investments are not performing as well as we would like. It’s how we would want to be treated if the roles were reversed. Our communications serve to inform our partners of our periodic performance, but they also serve to help our investment partners and us determine if our partnership is mutually beneficial, and that it is founded on shared investment ideas, values and goals.
The Concept of Margin of Safety Serves as The Foundation for Our Investment Strategy
The central concept of our investment strategy lies in having adequate safety in every investment we make. In doing so we remain focused on risk. We believe this is be the most important factor in achieving long-term investment success. An adequate margin of safety tips the risk-return ratio in our favor. Our margin of safety is largely dependent upon the price at which we pay for an investment relative to is long term economic intrinsic value. At a great price—one that largely undervalues the business, there might be a low risk of capital loss and a high likelihood of a favorable investment return and thus a large margin of safety. Alternatively, at a poor price—ie, one that greatly overvalues the business, there might be a high likelihood of capital loss and poor investment return. Price is a factor separate from quality (value) in determining the outcome of an investment.
Risk also lies in misjudging the level of value in an investment. Investments lacking adequate value may be poor investment choices at any price. It is this relationship between price and value that investors must successfully navigate; that is to say, investors must adequately understand whether the amount of value present in an investment merits a given price. It is an incredibly important relationship that requires the ability to accurately make both quantitative and qualitative assessments. When we are certain of our assessment of adequate safety in an investment, because of a large amount of value and a price that greatly reduces our risk, realizing superior investment returns tend to take care of themselves.
Above Average Investment Returns Derive from Market Inefficiencies
In general, most businesses and the assets they control are appropriately priced most of the time. However, from time to time for various reasons prices may diverge from underlying value either over valuing the underlying asset or undervaluing the asset or business. The price divergence from value is most likely to happen over short periods of time. Conversely over the long term, prices can be expected to move more or less in line with the value of the underlying business or asset. If done well, value investors maintaining a long investment horizon may realize above average investment returns generally in two ways. First, by making investments at a time when price greatly undervalues long term economic value, above average returns can be had as price move upwards towards more reasonable alignment with value over the long term. Second, investment of capital in high quality free cash generating businesses with ample reinvestment opportunities can product above average returns simply by holding these investments over long periods of time. These two straight forward strategies are major mechanisms by which we generate returns.
A Disciplined Pragmatic Approach to Investing
Investment success over long periods of time is difficult to achieve. Competition is fierce. The market is full of many intelligent, capable and diligent individuals looking to achieve superior investment returns. We attempt to achieve above average returns not by being smarter, but by being more pragmatic, more reasonable and more disciplined. We never try to time markets or provide market forecasts. Instead, we try to pricing markets continually price markets by understanding the amount of business value we are receiving for our investment dollars. In most markets and in most instances, we will not have adequate understanding on this issue.
However, volatility in public markets that occurs from time to time offer us the occasional opportunity to obtain a great deal of business value at very favorable prices, thus generating very favorable long-term returns. Thus, our success depends on our ability to be disciplined in our behavior, to remain patient, and to remain attentive for market opportunities.