Investment Approach
We aim to preserve capital and to generate excellent long-term investment returns. We approach every investment as if we were purchasing the whole company. We look for great businesses which we believe we understand, companies which are run by managers who are competent, honest and who act in the interest of the company’s shareholders. We look for companies with strong pricing power generating an enduring high return on capital. Having found great companies and good managements, we wait for the opportunity to invest in them at attractive prices that will earn a long-term return of 15% per annum.
We are indifferent to short-term share price fluctuations; we expect to make our return through the performance of the business, the profits it distributes and the growth in its long-term intrinsic value. We believe that the approach works because there is at times a divergence between the values of businesses in the real world and the prices that they sell for in the stock market. Studies have shown that in the short term there is no correlation between company fundamentals and share prices. Over the long-term however, there is a convergence between the cash generation of a business and its stock market value. This can take a long time, perhaps over 3 years, and for many that is too long to wait. We aim to be independent in our thinking. Buying unpopular stocks with problems can make you look like a fool for a long time. Making investments that the wider investment community sees as mistakes can be uncomfortable and if you are wrong the censure is greater. We form all our views independently based upon our own research, we know the crowd can be wrong and we try to understand why it might be the case. We are not contrarians, but we are often acting opposite to the prevailing consensus at key moments. For our investments to work, at some point the consensus needs to agree with us.
Monitoring our investments is an essential part of our process. We undertake detailed research which includes undertaking fieldwork, meeting companies, customers, competitors, suppliers, attending trade shows as well as exploring any other sources of information that may deepen our understanding of the business and industry that we are interested in.
Most of all we read a lot and think.