Investment Philosophy
   and Process

We seek to achieve superior long-term returns by buying a relatively small number of profitable, growing businesses that enjoy strong competitive positions in stable markets at prices that offer an attractive expected return. By owning exceptional enterprises at great prices, our clients are able to benefit from growth of the business, as well as the market’s eventual reassessment business value. The margin of safety embedded in the purchase price also limits the risk of permanent capital losses.

Three Keys to Our Philosophy

Focus on the asset: We are investors, not speculators or traders. As investors, we attempt to profit from the growth of the assets we own or the cash flows derived from those assets. In contrast, speculators and traders attempt to profit from fleeting changes in prices. As owners of businesses whose earnings power is protected by durable competitive advantages, we can remain patient—even opportunistic—in the face of short-term price volatility, confident that, in the long term, price correlates with value. In the words of Warren Buffett, “Time is the friend of the wonderful business, the enemy of the mediocre.” Read more about our business filters.

Margin of safety: It is axiomatic that even a great company purchased at too high a price can be a poor investment. Avoiding such an error requires some notion of a company’s value. Since the intrinsic value of the business is a function of future cash flows, there’s inherent uncertainty in estimating it. We achieve a margin of safety by first limiting ourselves to businesses whose cash flows are relatively predictable and, consequently, whose value we can more confidently assess. Second, we wait patiently until the stock is priced below what we think it’s worth before we buy any shares. 

Concentration: We limit our investments to a small number of great companies. This stands in stark contrast to many practitioners’ compulsion to diversify into hundreds of equity positions in an effort to reduce non-market risk. Our concentration strategy, on the other hand, is based on the following beliefs:

• The more stocks owned, the more likely the investor will be able to achieve only average returns.
• Owning too many stocks dilutes the best investment ideas.
• By owning only a few great companies, we can and must commit the resources to know them well, further limiting our risk of permanent capital losses.
• By owning 10–15 great businesses in varied industries, we are sufficiently protected against non-market risk.
• Because our definition of risk encompasses both the quality and price of a business, adding a position at the margin that possesses more uncertainty or less margin of safety could increase risk.

Read more about diversification.

Sell Discipline

When we initiate a position, we intend to be long-term owners. Our expected holding period is at least 3–5 years, but we will sell a position when:

• We reduce our appraisal of the business due to a diminishment of the competitive advantages, erroneous analysis, or poor management decisions.
• The price of our holding appreciates significantly relative to our appraised value.
• We find better opportunities.