“Above average investment returns require uniqueness of thought as well as behavior. It’s impossible to have superior investment results by conducting oneself in a manner similar to most other investors. To have results that are superior results, one must be remote from the crowd. It’s a simple idea but one that is rarely consistently followed.” — Patrick S Weston
It’s an absolute certainty that most investor will achieve average investment results over their investing lifetime. We believe we will continue to have different investment results because our investment approach, our perspective and our actions are unlike most other investors.
This is exemplified in a number of meaningful ways:
- Our investment decisions are driven by business value – The value of any business is ultimately derived from its ability to generate future free cash flow from its owners. The most valuable businesses are able to generate increasing amounts of cash over long periods of time. This long-term cash generating ability of the business may not be fairly represented by the most recent trading price of the business’s stock. Price may vary widely over short periods of time; business value is much less likely to do so. Most investors would be better served trying to understand the value of asset or business in which they have invested their capital, rather than the price target of their stock over the next 12 months.
- We are patient investors and maintain a long-term perspective – We are interested in the long-term value of a business. For a number of reasons business performance may vary. Very good businesses may have periods of underperformance. However, over the long term its the characteristics of the business that will ultimately win out. The key is to be patient. We keep this in mind when making investment decisions.
- We define and focus on risk differently than most investors – Simply stated, we define risk as the potential for loss of investment capital. We stay focused on protecting our downside, knowing that invariably there will be opportunities that come along offering us tremendous upside. The key is to be patient, and to have ready capital when these opportunities arise.
- We are price sensitive – Price matters. The price paid for a business or asset is highly correlated not only with the return on capital invested, but also with the likelihood of capital loss. We are price sensitive because when we are able to obtain a high-quality asset at a good price, it raises our return and lowers our risk of capital loss.
- We are people and partnership oriented – For almost every business we have encountered, the resource most important to long-term success and sustainability are the people that particular business employs. With respect to our investment partnership, our future success is ultimately dependent upon our ability to attract and retain investment partners who share our values and investment philosophy. We try hard to uphold the notion of “Partner.” This is true with regards to the business in which we invest, and the investors whose capital we invest and put at risk. Its unfortunately how many investors lose sight of this apparent truth.
- We seek to avoid or minimize competition as much as possible – This can be best achieved by investing in dominant businesses with strong competitive advantages. Dominant businesses are those that, because of a lack of meaningful competition, or because of unique business characteristics, allow it to generate above average profits, returns on invested capital and rates of growth. Meaningful competition tends to be the norm for almost all businesses. The ability to increase market dominance in spite of competitive onslaught, and the ability to do so over long periods of time requires strong management and the presence of strong competitive advantages. These are the businesses we find most valuable. We spend most time trying to understand if potential investees fit this ideal.
- We intimately understand that price and value are not one and the same – A business or asset is not necessarily worth more because the price has gone up, nor is it necessarily worth less because it’s price has gone down. We make our own conclusions about value and wait patiently for a price that meaningful discounts our estimate of value.
- We are not concerned with price volatility – Not only do well believe that volatility is of little concern to us, we also believe that price volatility offers us a unique advantage by giving us a buying opportunity in one instance, and offering us a selling opportunity in another. For businesses that we really like, were the market price to decline it would induce us to buy more shares, not to sell, thereby giving us a larger proportion of a good thing. Of course, this might have the effect of causing us to report negative investment returns for a period. So be it. We feel fortunate to be able to own an increasing proportion of a valuable business that we really like, and for which we have a reason to believe superior future results will be achieved over the long-term.
- We do not seek or have as a goal to beat the S&P 500 every year – Instead, we seek to beat the S&P over time. It is almost a certainty that our results will not be superior to the S&P consistently, year after year, after year. Instead, our results relative to the S&P will likely vary from year to year, on the positive side as well as the negative. What is important is our investment results over time. This remains our focus.
- We seek opportunities wherever we can find them – We’re not relegated to any particular area or industry
- We are aware of our limitations – For most potential investments, we will not be able to develop sufficient understanding or certainty so as to feel comfortable enough to make an investment. We believe this is a distinct advantage as opposed to a disadvantage, as it should help us to avoid unintended investment mistakes and should over time lower our investment risk.
- We seek to be invested in fewer businesses, each of which we have a deeper understanding – This is in contradistinction to most investors who would rather be “diversified,” thereby invested in more businesses but understanding less about each. We try to make few decisions and attempt to have greater certainty in each instance. This requires patience. However, this is likely to result in few mistakes and reduce the likelihood that we lose partner capital. Sometimes less is actually more. This is likely one of those examples.
- Our goals is to achieve above average long-term compounded returns on investor capital – We ultimately measure our success by our returns on investor capital. So long as we invested capital in quality business, partner with quality business people, exhibit patience, and we remain focused on minimizing risk, we believe we can achieve this goal.