The bar for inclusion in our portfolio remains high with each new investment having to exceed the risk-adjusted upside potential of our current holdings.
We are long-term value investors with a concentrated portfolio of companies. As such, we tend to focus on fundamentals, transact infrequently and experience very low turnover. We adhere to the adage of “first do the work in front of you,” and thus, we continuously monitor our existing holdings before we look for new ideas. If you are successful in purchasing a great business for a reasonable or low price, the main determinant of your future returns will be the trajectory of its earning power. Key to this is demand for the product and the competitors’ response. We spend a great deal of time studying our companies, their competitors and the industries in which they operate.
We study the annual and quarterly reports of companies and their competitors; visit with and interview managements at their offices; read and analyze proxy statements and conference call transcripts and consult legal and tax experts. The real work is in the investigation, analysis, discipline and patience. In a 24-hour news world, the key is tuning out the talking heads and stock market prognosticators while staying focused and disciplined.
We look to buy great businesses at a discount to their intrinsic value – well managed businesses with recurring demand, little competition, strong defensive characteristics, earnings growth, high returns on capital and high levels of free cash flow so that our investments can compound tax efficiently. Many companies meet one or more of these criteria, but very few meet them all. Thus, when we find companies that meet all of our criteria, we are loath to sell them unless (i) the competitive environment has deteriorated, (ii) management has changed for the worse or (iii) their stock market valuation has grown far in excess of our estimate of intrinsic value. In all of our investments, we adhere to our established criteria and process.
We prepare, wait and act with conviction and in a meaningful way when opportunities present themselves.