Investment Philosophy

In addition to our years of investment experience, many of our investment principles have been shaped by teachings from the usual suspects - Warren Buffett, Ben Graham, Phil Fisher, Walter Schloss, Ray Dalio, Seth Klarman, Bill Ruane, Michael Larson - as well as several value-oriented fund managers in our direct network.

We believe that a concentrated, heavily-researched portfolio constructed from bottom-up, fundamental work is the most prudent way to manage an equity portfolio. Our key investment beliefs are rooted in the following principles:

• Playing Field: we only invest in businesses that we can understand. While we can never fully comprehend the drivers of a company or industry from the outside looking in, we can avoid situations that we know to be well outside of our circle of competence. We estimate that well over half of publicly-traded companies are outside of our wheelhouse, and we are comfortable with that. Most of our ideas come from pockets within the industrials, consumer, technology, and materials sectors.

• Screening: we typically resist using stock screeners and prefer to hunt for new ideas by reviewing every stock in a custom-defined subgroup or by connecting dots from our other research. Many times we will look through an entire industry, a group of significant underperformers, stocks with new CEOs or insider buying, and stocks sharing other qualitative or quantitative factors. While this takes more time, most of our best ideas would not have turned up in the screens we run. Generally speaking, we prefer businesses that generate consistent free cash flow, maintain healthy balance sheets that provide capital allocation optionality, are out of favor due to temporary or correctable headwinds, have ability to structurally improve their return on invested capital, are less sensitive to macro factors outside of their control, and can compound their per share value long into the future. 

• Research Process: once a handful of interesting stocks has been identified, we will start with the one that interests us the most and continue our research until conviction is reached or we learn something that causes us to lose interest in the opportunity. Our research process is not rocket science - we start with gaining a deep understanding of what the business does, why it has out- or underperformed the market in recent years, and what the key drivers are for the stock to work going forward. While it sounds simple, this process usually takes anywhere from 10 to 50 hours of work. By this point, we typically have a reasonable grasp on consensus and, hopefully, are able to start developing a contrarian view on the business situation. To gain conviction, we will often reach out to industry contacts, conduct deeper research on the stock's key drivers, and estimate a company's intrinsic value to establish "Buy" and "Sell" prices.

• Portfolio Construction: we believe the benefits of diversification fade quickly beyond a portfolio's initial 20 positions. Our portfolio is built based on current opportunities in the market, not a benchmark. Therefore, our sector weights, cash amount, and number of holdings yield a portfolio that looks very different than the stock indexes. There are few truly good ideas at any given time, so it is important to concentrate in them when the opportunity arises. In-depth research and very attractive valuations lower the risk of a concentrated strategy. 

• Holding Period: we look to hold stocks for periods measured in years, not quarters. We sell if our thesis breaks and the downside risk remains significant, or if a stock's discount to intrinsic value closes. We prefer to own most stocks forever and seek to hold most stocks for at least 3-5 years.