"It is easier to resist at the beginning than at the end." -- Leonardo da Vinci

 

We cannot always control the short term, but by focusing on our process, we ensure that the long term outcome is favorable for our investors.

 

Our fundamental research process is the result of over 15 years of continuous refinement. Our process entails:

  • Develop new framework or refresh on existing framework of key performance indicators of a business.

  • Expand understanding of competitive advantages and short, medium, and long term trajectory of the business

  • Create hundreds of questions as we begin our conversations with customers, suppliers, and competitors as we gain a deep understanding of the unit economics of the business

  • Understand why a business is priced a certain way, and identify the discrepancy between perception and reality

  • Identify a valuation where the margin of safety would be sufficient to justify an investment

  • Author a premortem to identify what could go wrong

  • Add company to our watchlist funnel

  • Invest when the opportunity presents itself

TYPICAL INVESTMENT TYPES

  • Compounders

    • Great businesses

    • Mid cap companies

    • Sustainable business models

    • Management team with an ownership mentality

    • Strong cash flow profile

    • Clearly defined plan for maximizing shareholder value

    • Long runway for growth

    • Ability to reinvest large amounts of internally generated cash flow at high incremental returns

    • Time arbitrage component that is mispriced by short term investors

    • End markets that are stable or growing, but NOT shrinking

    • Not susceptible to rapid technological change

  • Value with a Catalyst Situations

    • Good companies with an inherent misperception which restrains valuation

    • Near term catalyst to inform investors of the error in valuation

    • Companies with an identified and easy to achieve path to boost margins

    • Valuation support that provides a margin of safety

RISK CONTROLS

  • 15-20 uncorrelated businesses

  • 5% average portfolio weighting (and no more than 10%)

  • Industry weight of no more than 25% of the portfolio

  • If an investment

    • Underperforms its sector by more than 15% over any trailing 30 day period, or:

    • Has 2 consecutive quarters of missing our internal or consensus earnings estimates, or:

    • Has any notable change in company key performance indicators

    • -->The investment goes in the penalty box

      • Reunderwritten to isolate original thesis, market concern, and to avoid thesis creep

      • Outside research conducted to identify potential flaw in investment thesis

      • Position is reduced, left alone, or (rarely) added to

SELL DISCIPLINE

  • We adhere to a strict sell discipline to prevent thesis creep and to ensure a check on our process. We sell when:

    • Position approaches 10% portfolio size from appreciation

    • Original thesis is proven wrong 

    • Fair value is reached

    • A better investment opportunity comes along

    • Risk controls mandate trimming or cutting the position