We believe there are, at any given time, a limited number of great equity investment ideas. That's why we manage concentrated, high-conviction portfolios that are not concerned with benchmark names or weights. Our equity portfolios are typically comprised of 25-35 names, and it is not uncommon for us to invest 40%-50% of net assets in the top ten holdings. By taking larger positions in our highest-conviction opportunities, we can deliver a return profile for investors that is differentiated from the indices.
The qualitative characteristics required for us to have high conviction in a company include:
- An understandable business with reasonably predictable future cash flows
- A business with primary control over its own destiny and a buffer against uncontrollable events
- A business that generates more cash than is required to operate
- A business run by honest, intelligent management who treat shareholders as partners
If a business meets these criteria, it’s worth a deeper look. We begin with a fundamental analysis of the company, then perform full due diligence to determine its intrinsic value. For us to invest, the stock must be selling at a discount to our calculation of what the company is worth. For more on our approach to Value Investing, click here.
Courage of our convictions
Human behavior and market sentiment are more volatile than the intrinsic value of a business. The pricing anomalies that result can benefit our value investing approach, allowing us to take a long-term, and at times, contrarian view. We build concentrated portfolios and may invest in companies that many other traditional value investors may not. And if the price of a stock we own drops for non-fundamental reasons—and the investment is poised for long-term success—we have the courage to buy more shares. We believe this approach and our differentiation from the indices gives our investors greater potential to realize higher returns.
Maintaining a high-conviction approach
The way we do things is vastly different than many market participants today, who do not deviate much from the broad indexes. We take a long-term, systematic and logical approach, concentrating on what we believe to be the best opportunities with the greatest return potential. We have the patience to wait for the right price before buying and to hold great businesses through temporary stock price downturns. As important, we are disciplined enough to sell when a stock reaches our full valuation, when a company’s long-term prospects have changed, or when we find more compelling opportunities.