Find Excellence, Buy Excellence, and Add to Excellence Over Time; Sell Mediocrity

We are constantly in pursuit of truly great businesses led by talented, passionate, and honest managers who are also business owners.  Like rare diamonds or unique pieces of art, extraordinary businesses and management teams are exceedingly rare.  Once we find them and understand their magic, we want to buy them and hold on to them tenaciously.  We intent to stay with these winning companies through daily, weekly and monthly gyrations, through mild bear markets and severe bear markets, crashes, and corrections — through analysts’ upgrades and downgrades, technical sell signals and fundamental blips.  We will hold as long as our confidence in the leadership’s ability to compound value remains intact.

 

A few extraordinary businesses, a few significant winners, are what truly count in a lifetime of investing. The key is to stick with them as long as they remain extraordinary.

 

In Order to Succeed We Must First Survive

Warren Buffett encapsulated this principle perfectly: “Investors produce outstanding long-term results primarily by avoiding dumb decisions, rather than making brilliant ones.”  Most investors focus on thriving in the markets; we focus on avoiding the major pitfalls. We believe that by steering clear of the big losses, we ensure that we can stay in the game. When we prioritize downside protection, the upside often takes care of itself.

 

Think Like Business Owners; Think Long Term

The overarching principle of our investment discipline is to approach buying a stock as though we were buying the whole business outright and retaining management.  When making investment decisions we focus on the long-term prospects of the business and look beyond the short-term volatility and market unpredictability. We let volatility work to our advantage as we don’t believe volatility equates to risk. On average, individual stock prices fluctuate more than 75% in a 52-week period. We welcome volatility as volatile markets occasionally offer extraordinary opportunities.

 

Avoid Stock Market Predictions

We do not scrutinize or make predictions about where the stock market is going.  Focusing excessively on macroeconomics, politics, direction of interest rates, and spending time and energy on trying to avoid the next downturn can be prove to be a costly distraction from the compounding of capital.  As Peter Lynch astutely observed: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.”  It’s not that we don’t care what the market is going to do.  It’s that there is nothing in our record that suggests that we can add any value by making those predictions, so we don’t bother.   Instead, we remain focused on what we do well — identifying high quality, well-run businesses that are likely to compound our capital at double-digit rates of return over the long run. This approach has proven to be successful for us throughout our investment careers, and we will continue to focus on that because we think it’s logical, repeatable, simple and straightforward. 

 

Think Independently

We do our own original deep research and believe that independence of thought is key to long-term investment success. We also believe that relying on others' analysis results in paralysis or panic under volatile conditions. Groups (groupthink) have a tendency to reinforce preconceptions and suppress critical thinking.

 

Stay Within Our Circle of Competence, Yet Stay Curious and Expand That Circle

We believe the most important three words in investing may be: I don’t know.  Having strong viewpoints on a lot of securities, and acting on them, is a sure-fire way to poor returns, in our opinion. We only focus on businesses that we can thoroughly understand.  We try not to fool ourselves and are not afraid to put an idea into a “too hard” pile.  

 

We try to find a balance between not fooling ourselves, and at the same time, not automatically dismissing potentially great companies without first trying to understand what's behind their success.  There is always an opportunity to put it in the ‘Too hard pile’ after we have done our homework.   We have a curious mind and strongly believe that if we compound our knowledge every day and go to bed a little smarter than we were the night before, it will significantly add to our returns over time.

 

Always Demand a Margin of Safety 

Similar to an engineer constructing a train bridge designed to support 500 tons of rolling stock but calculating for 750 tons, we approach our business evaluations with a conservative mindset. Our goal is to protect against the permanent loss of capital by being prudent and reasonable in our assumptions.  However, it’s easy to confuse a statistically cheap price with a margin of safety.  We have found that when valuation is the overriding driver of interest, we are prone to get involved in challenging businesses or complicated ideas.  So we have learned to avoid cheap stocks — some cheap stocks are cheap for a reason and deserve to stay that way.   We rely on our 3-Part Engine Framework as our primary source of margin of safety.   We try to ensure that we do not overpay for any business, as no company is attractive at any price.

 

Pay Up for Quality 

When we find a really good business run by first-class people, chances are a price that looks high isn’t high enough.  The combination is rare enough — it’s usually worth a good price!  Here again, it’s a balancing act with our margin of safety principle. Just like we got involved in the past in some challenging situations by being too attracted to the ‘cheap price’, we also passed up on a lot of great businesses because the price was ‘NOT CHEAP ENOUGH’.  We are willing to pay a premium for the quality of the business, management and reinvestment opportunities.  Even if we don’t get much of a discount on the price, our investment will work out well over time as long as we’re right on the business and the management. 

 

Thorough Due Diligence and Patient Investment Scaling

Before committing a substantial portion of our investment capital to any single company, make sure that we have followed and studied the company for several years, gaining a comprehensive understanding of its business model, operating history, and management's character. We limit initial investments to a smaller percentage of our portfolio, particularly for companies lacking a proven track record or clear performance data across economic cycles. We have learned through experience thats it’s generally a bad idea to bet on a company with a great story but that has yet to prove its ability to execute.  We will consider increasing our investment only after management has proven its consistent ability to execute.  Building a sizable position in our portfolio is the same as building trust in a relationship. It can’t be rushed.  We need to experience how the management/business will react in good and bad times and how they will treat us as shareholders.  We let the position earn its scale.  This approach prioritizes risk management and seeks to avoid costly mistakes by emphasizing the importance of thorough due diligence and patient investment scaling.

 

Avoid Leverage   

We like to sleep well at night. Leverage can enhance returns, but it can also lead to huge losses of capital from which it can be impossible to recover. You can’t win a race if you don’t finish, and too much debt can take you out of the game at the worst possible time. 

 

Let the Portfolio Concentrate Itself in Winners

The positions that go up and become larger pieces of the portfolio (naturally) have earned that right. The ones that go down and become less significant have earned their fate.  The reality is that our portfolio wants to be in winners and it will concentrate itself more and more into winners if we just let it.  Simply put, it’s easier to sleep at night when your largest position got that way by going up (earned the right) vs. an underperformer you keep adding to trying to prove to the market that you are right.   

 

Exercise Patience and Discipline to Only Invest in, What We Believe to Be, EXCEPTIONAL Opportunities

There are no called strikes in investing, so we can wait patiently for the truly fat pitches right in our “sweet spot” before taking a swing. Once an opportunity is identified, we will make bold rather than timid decisions (meaningful bets) where we see high probability of above average returns.  

 

While our aim is to be fully invested, we will not let cash burn a hole in our pockets. Cash combined with courage in a time of crisis can be priceless. As Charlie Munger wisely observed: “It takes character to sit with all that cash and do nothing.  I didn’t get to the top where I am by going after mediocre opportunities.” 

 

Comfortable Doing Nothing

The hardest part in our business is holding on to your positions and doing nothing.  We believe that activity is the enemy of returns, and we are quite comfortable doing nothing until there is something truly worthwhile to do.  We spend our time doing a lot of reading and thinking and NOT a lot of acting. In that we are sort of the polar opposites to a lot of investors. Many investors do a lot of acting, and not a lot of thinking. “All of humanity’s problems stem from man’s inability to sit quietly in a room alone” – Blaise Pascal.