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- Partnership – We are looking for partners. We want to establish partnerships both with our clients and with the management teams of our investment holdings. We “eat our own cooking”, in other words we are personally invested in many of the same holdings as our clients. This doesn’t guarantee that our investments will go up, but it does mean that the principals share in both the gains and the losses. We form partnerships with the managers’ of our investments by focusing on companies that have shown a pattern of putting their shareholders first.
- Price – Price is the most important component of the investment process. As Warren Buffett stated in his January 1963 Partners Letter, “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results”. If one is buying investments at a good price, it is highly unlikely that he or she will face the prospect of significant losses. Academic studies have shown time and again that a simple process of isolating the cheapest stocks on a number of different variables, including price-to-book values, price-to-earnings ratios and price-to-cash flow ratios has produced market beating returns with less risk.
- Principal Risk – We worry about the permanent loss of capital, not short-term price fluctuations. As a result, “benchmark risk” or underperforming some market index like the S&P 500 at some point in the investment cycle is a reality of our process. The firm’s goal is to achieve strong absolute investment returns over time without allowing our capital or our clients’ capital to be vulnerable to unnecessary impairment. This will sometimes mean that cash is an important asset class for the firm, and that flexibility within the investment process is paramount.
- Patience – The short-term orientation of many investors, and the reluctance to realize the cyclical nature of both markets and the economy are what create the opportunities to buy great assets at attractive prices. In order to capitalize on certain investors’ short-sighted behavior, we must remain patient long-term investors.
- Profitability – We want to commit capital to above-average businesses. One way that we can tell that a business is extraordinary is that the company consistently generates high returns on invested capital. The persistency of the superior returns on investment speaks to the fact that the company has some sort of competitive advantage versus competitors, which typically translates into long periods of outsized performance.
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