Our Investment approach
WE THINK AND ACT LONG TERM
IN THE SHORT TERM (1-3 YEARS)
Over short periods, share prices move with macroeconomics, sentiment and quarterly business results.
These are random.
We have little chance of predicting them
OVER THE LONG TERM (5-10 YEARS)
Over longer periods, share prices reflect the economic value which the underlying businesses create for their owners; the return they earn on their owner’s capital.
This depends on their competitive advantages, the strength of their management and the investment decisions they take.
We have a greater chance of understanding these factors.
WE SPEND OUR TIME LOOKING FOR EXCEPTIONAL BUSINESSES
Some businesses persistently earn high returns on capital. This is because of their enduring advantages such as:
Intangible assets which give them pricing power
Scale economies or unique advantages which give them structurally lower costs
A network effect where the value of their service increases as more people use it
These allow them to compound economic value over time.
We spend our time searching for these businesses, trying to figure out how strong their advantages are and how long they could last.
In addition, we look for those with low levels of debt, based in politically stable countries and run by management teams who take long-term views, are proven efficient operators and capital allocators and have a history of treating shareholders as partners.
WE STAY DISCIPLINED
Once we’ve identified these exceptional businesses, we work out how much we think they’re worth based on the cash they could reasonably be expected to return to owners over time. We rate our conviction for each one. And we use this to work out the margin of safety we need before buying and how much to buy.
Then we wait.
We don’t watch share prices. Instead, our proprietary system alerts us when the price is right and tells how much to buy based on this price.
WE OWN A CONCENTRATED PORTFOLIO
Finding these opportunities is tough.
Which is why we own a small portfolio of around 15 to 20 shares. This is enough to make sure we’re sufficiently diversified while at the same time allowing us to invest in only the best businesses.
It’s also why we rarely sell. We only do so if the fundamentals deteriorate or we realise we’ve made a mistake.
OUR APPROACH INHERENTLY REDUCES RISK
We think of risk as the likelihood that we lose our capital, not the swings of share prices.
By investing only in above-average businesses, we reduce our likelihood of our estimates being wrong. And this is enhanced by the conservatism in our assumptions and the margin of safety we demand before investing.
Our conviction rating helps reduce our bias as does peer review of our research.
We don’t measure risk relative to a benchmark index. However, by investing in above-average businesses at reasonable prices, we should, over time perform better than the index while taking on lower fundamental risk.
