Our Investment Process

“Everyone has a plan until they get punched in the mouth.” - Mike Tyson

We forged our investment philosophy from decades of experience investing and working with clients through bull and bear markets. The most important thing we have learned is that an investment philosophy must be able to take a punch to be enduring, effective, aligned with common sense, and to retain the confidence of clients through all seasons. Growth oriented investment strategies that lack a margin of safety fare poorly in downturns and do not survive. Value oriented investment strategies struggle when the fair value an investor imagines exists in a business remains unrealized as time passes along with better opportunities. We have found that strategies that rely heavily on specific outcomes outside our control for their success, such as the future price level of a commodity or a change in government regulation, are sufficiently unreliable as to make them unhelpful in the quest to build enduring wealth. Changes in interest rates, politics, technology, fashion and culture are guaranteed to occur over time and will spur uncertainty and anxiety. Relying on a few bedrock investment principles helps our clients remain steadfast in challenging times.

In our equity investments, we love to see:

Conservative capital structures. Even when borrowing costs are generationally low, keeping cash on the balance sheet provides flexibility to invest in new projects, make opportunistic acquisitions quickly, and provide confidence in business continuity even if business slows for any reason. This can provide an advantage over competitors, especially during times of economic distress. Conservatism is a mindset that businesses demonstrate over time. Watching the movie of a company over time by studying its history in depth provides a sharper view than examining a single still photo of a company’s most recent developments.

Committed managements with shareholder orientation and skin in the game. Some of the most successful companies of all time have been led by long-tenured managers. As investors, we think of ourselves as partners in the business with management, and we seek managers who view their role similarly. Often, but not always, a family has built the company and family members remain in positions of responsibility. With long-tenured managements, if the company has a demonstrated track record of success one can typically expect more of the same. Long-tenured managers understand their industry and their customer base more deeply than managers coming from other industries. Importantly, a company with a long history under a continuous management team has most likely built a consistent culture. Employees know what managers expect and how to advance in the company. If there is a culture of promotion from within, employees will also believe they can make a career at the company and will be less likely to leave. Conversely, companies can languish, or worse, when turnover in the C-suite is high. Changing expectations from the top can leave employees demoralized and looking for opportunities elsewhere. Finally, a high level of insider stock ownership by senior executives suggest that long term share price performance, not the size of the pay package, motivates long-term shareholder oriented decision making. A pattern of stock grants to senior management quickly followed by share sales suggests the opposite.

Businesses that have cultivated a strong emotional component in their products or services. We have seen it in ourselves and in those around us - a willingness to drive miles out of our way, to forego sleep, to wait in line for hours, and to pay a premium price to buy a certain product that to others, those who "don’t get it," seems mundane. We do this not because we are perfectly rational, but because owning and using that company’s product or service provides us a sense of well-being that a competitor’s offerings simply do not bring. This type of brand relationship consumers feel cannot be quickly built or easily replicated, but where it exists and is meticulously maintained it creates a virtually unassailable barrier, leaving competitors resorting to discounting and promotions to fight for the remaining scraps of business. Owning interests in businesses like these can provide us an advantage that feels almost unfair and that can endure for many years.

High margin, high return businesses. We say these businesses are in "good neighborhoods." Certain types of businesses just lend themselves to producing higher returns than others. Sometimes this can happen because a company can charge premium prices while controlling costs. Other times, a company requires low incremental investment to generate additional revenue. In some cases, high returns attract competition, but in a surprising number of cases even competition cannot kill returns for the best operators. There may be a technology advantage, a replenishment need, or combinations of these and other factors that contribute to a business being one with high margins and high returns.

An ability and willingness to compound success by reinvesting in the business at high returns, or to return capital to shareholders when prudent. Businesses that benefit from the ability to reinvest their capital at high returns, and that also benefit from one or more of the characteristics detailed above, have the potential to compound shareholder returns at high rates for many years. While investing earned cash flow into maintenance and growth should always be at the top of a company’s priority list, share repurchases, funded from free cash flow, intended to reduce overall share count are one of our favorite indicators of a shareholder friendly management. When a profitable company reduces its share count, each remaining share increases in value. A company that is already valued at hundreds of billions or even over a trillion dollars will be highly challenged to consistently find reinvestment opportunities that will significantly move the needle. While we would absolutely consider owning shares of companies that throw off vast amounts of cash and return that cash to shareholders via share repurchase, dividends or a combination, we prefer, when we can find them, companies with ample room to grow by reinvesting at high returns in their core businesses.