Investment Philosophy & Process
Investment Philosophy
Markets are emotional and short-term oriented. As a result, the securities of advantaged, wealth-generating businesses are often mispriced because most investors do not fully comprehend the companies’ potential for sustained high growth and improved profitability. We believe the best way to exploit this phenomenon is to find these businesses and to invest with a long time horizon. To do this, we seek advantaged companies that:
Stand to benefit from durable, long-term trends
Possess competitive advantages that enable them to capture the lion's share of the profits created by those trends
Can be purchased at reasonable valuations
Companies that meet all these criteria are rare, which is why our portfolios are concentrated. Turnover is low because when we identify a company with a strong growth runway, we hold onto them and reinvest profits at a higher rate of return.
A Rigorous Process
Prior to implementing our four-step process, every company must be supported by one or more long-term trends and exhibit historical success in revenue growth and profitability.
Step 1:
Competitive Advantage
We spend a great deal of time analyzing a company’s people, product, process, and presence advantages. Ultimately the strength of those advantages drives long-term sustainable returns.
Step 2:
Quality Assessment
We believe you can win by not losing in this business. A company’s quality characteristics provide important insights in terms of potential strength and future growth – and reduce risk of a negative surprise.
Step 3:
Geographic Footprint
A proprietary geographic footprint analysis is conducted on companies considered for investment to determine significant revenue and currency exposure as well as economic risk by country.
Step 4:
Valuation
Intentionally, valuation is the last step in our process because it prevents us from eliminating an otherwise great growth idea based on valuation. We forecast cash profits and compare them to the current cost of the business. If the company is reasonably valued, it is a candidate for inclusion. If not, it is moved to the watch list.
At every step we ask: Is this new idea better than one of our existing holdings? How does it represent a better use of capital? This results in higher conviction investment decisions.
Portfolio Construction:
Conviction-weighted portfolios
We determine weights in the portfolio by ranking holdings based on proxies for attributes we require in our portfolio companies – growth, attractive price, and competitive advantage. This process prompts the investment team to address disconnects between a holding’s current weight in the portfolio and its proprietary quantitative ranking and, we believe, plays a major role in our ability to drive returns and protect capital over an investment cycle.
