We started our firm with the aim of creating as ideal an environment as possible to compound client wealth over time. It had to be one in which we would treat client capital as we would our own – where we could be true to our investment beliefs and where we could take decisions which may be painful in the short term but are likely to pay off in the long term. It had to be an environment where we could spend our time doing what we love; finding and understanding exceptional businesses, rather than chasing assets. And where we could be selective with our clients, choosing those who are like-minded; who are patient, understand our approach, value our transparency and thoroughness and are looking for long term growth in their wealth.
We were also trying to create an environment where we wouldn’t be obsessed with beating index benchmarks; we think these comparisons are one-dimensional. A typical index is made up of thousands of both low and high-quality businesses; we aim to own only a handful of high-quality ones. An index includes over- and under-valued businesses; we aim to invest only in those which are undervalued. Therefore, our portfolio is less risky than an index and comparing returns alone doesn’t take this into account. More importantly, if our sole aim is to beat the benchmark, we think we’ll be tempted to copy it, especially over short measurement periods.
Typically, active managers buy shares at a certain price, hoping to sell them when they reach a higher price. That is, they buy shares with the intention of selling them. To do this successfully, they must continually look for new opportunities. This requires them to know hundreds of businesses and to take hundreds of decisions. It requires them to rely heavily on their valuations and in turn their forecasts and assumptions – inherently fraught with error. In the process, they incur higher trading costs and taxes; which is destructive to returns.
Instead, we invest only in exceptional businesses. That is, we buy shares which we’d like to still own in 10 years’ time. As there are only a few of these businesses around, we get to know them very well. And while most investment managers and the rest of Wall Street are preoccupied with forecasting earnings, we’re trying to answer a different question altogether; how likely are the business’s advantages to last? We think we have a greater chance of answering this correctly. Because we trade infrequently, we incur lower trading costs and taxes than typical managers – this is powerful for returns.
And finally, we don’t buy any shares for clients we don’t also buy for ourselves. Not many managers do the same.
We do admit that it’s challenging to be constantly in touch with the day-to-day happenings of the companies we’re invested in from where we’re based. But we don’t think this is a bad thing. We try to make decisions based on the long-term outlook for companies, not on short-term events.
And being far from Wall Street analysts who write convincing reports to buy or sell based on the short-term outlook isn’t a bad thing; we aren’t tempted to change our minds frequently.
So, we think that a bit of distance helps us see the big picture.
We do try to travel as much as possible; to visit company management, its operations, competitors and customers and attend industry events. And technology helps; management webcast results and it’s not difficult to call or email management – for smaller companies – or Investor Relations – for larger ones – with questions.
A palm tree is one of the few trees that can withstand a hurricane. This is because of its firm roots. We believe that our process will hold our long-term performance firm in the same way, regardless of market conditions.