We believe the foundation for successful investment lies in the relationship between price and value.
We believe markets are efficient in the long-term. In other words, investors can approximate the value of securities, and over time, price should move in the direction of value. There are many ways to approximate what something is worth, but at the end of the day, the value of any investment is equal to its discounted future cash flows.
We believe the price you pay is the most important determinant of long term returns.
The most reliable gains are made through purchases below intrinsic value, a critical factor in limiting risk. Great businesses are not always great investments, and stocks are not always priced to generate “average” returns. An investor’s margin of safety is always and only dependent upon the price paid. It can be large at one price. It will be small at some higher price. And it can vanish at some still higher price.
We believe the relationship between price and value can be distorted by cyclical, psychological and technical factors in the short term.
As a result, investment decisions must be made in the context of economic and sentiment cycles, which may not have a significant impact on value, but can create meaningful swings in price. In other words, we invest bottom-up but worry top-down.
We believe that exceptional returns are created by concentrated portfolios, as excellent ideas are few and far between.
In the absence of opportunity, we are quite comfortable holding cash, as dry powder provides today’s buffer and tomorrow’s opportunity. To do so, requires discipline and the conviction to act with boldness when an opportunity presents itself. Value investing is simple, but not easy. Only a strong sense of value can provide the courage to be cautious when others are complacent and to be aggressive when others are unnerved.
We believe it is impossible to produce superior results without doing something materially different than consensus.
While the majority operate in a narrowly focused world obsessed with “style boxes” and “tracking error” we believe constraints prevent investors from capitalizing on the full range of opportunities. Flexibility is critical as value may emerge in various forms. As such, we invest across the capital structure and remain indifferent to investments in diverse asset classes, industries, and geographies, at the right price. External investments with like-minded, long-term investors complement our internal capabilities, expand our investable universe and deepen our understanding of financial markets. In short, external managers expand our circle of competence.
Learn more about our investment process here.