Investing, not trading We do not "trade." We invest with the goal of protecting the purchasing power of your capital. This includes buying good to excellent companies at good to great prices and allowing their value unfold over time.
Our ownership mentality means we aren't too concerned with statistically meaningless short term fluctuations in prices of our holdings.
We are concerned with the intrinsic value of our holdings and how that changes over time. We believe our long term approach gives us a competitive advantage in today's ultra-finicky capital markets.
The composition of our holdings will change over time but we expect a few common themes. We like companies with hard to replicate assets - be they in technology, market position, know-how, or people. We like companies with tangible assets, that manufacture goods, or own natural resources. We like management teams that have a track record of conservatism and value creation. We shun most financial, biotech, and information technology companies as we find them difficult to understand.
Lower risk improves return Financial theory states returns are determined by the amount of risk taken: take on more risk and you get more reward. Yet if this were true, Warren Buffett, one of the most risk-averse investors of all time, would not be as successful as he is. His example flies in the face of convention. Minimizing risk is the single most important component of his job, as ours. Which begs the question, what is risk?
We define risk as loss of capital. We try to understand what we are buying and buy it at a low price (in relation to its value). By doing so we simultaneously lower risk and increase potential returns.
Proprietary research We think we have a real advantage in our proprietary research techniques. We study data most professionals don't consider, such as the quality of Boards of Directors and management compensation. Corporate governance maven Nell Minnow of GMI Ratings has noted executive compensation is inverse to stock price performance. The more executives are paid, the worse they perform. We examine SEC filings for compensation structures that could alert us to future problems at a company. We also look for well-designed compensation plans that could be a clue to high quality companies.
We also focus on a company's return on capital, Economic Value Added (TM), as well as proprietary metrics. We pay close attention to how well management allocates capital. A business can deliver a good return on capital but still waste money on pricey acquisitions or failed ventures, thereby negating those returns.
These are just several of the analytical lenses through which we evaluate potential investments. Our goal is to get under the hood of a company to understand the smallest nuances up front that could sink an investment later. All investors will make mistakes: our goal is to perform an inordinate amount of work upfront to minimize the impact of errors.
Discretion pays We say no to potential investments all the time. Sometimes we do not know enough to value the asset with a high degree of confidence. Other times the asset simply is not cheap enough.
We are very disciplined when it comes to our purchase price for two simple reasons.
First, once you buy a stock, you can never change your purchase price. You will be quoted an almost infinite number of prices to sell it, but your purchase price is locked in forever. Since stocks bounce around (note the large range between a typical 52 week high and low), buying early can lock in a price that is then eclipsed by lower prices.
Second, since losses and gains exist on the same sliding scale, buying low not only minimizes potential losses, it simultaneously opens up a large avenue for future gains.
Great deals in the stock market are rare. Hence, most of the time we say no. This however, is taboo to the fund management industry. The industry suffers from the "do something" problem. It receives customer money, the customer says "do something," and even if there is nothing great to do, the manager feels pressure to act, and consequently buys assets at what he knows are mediocre prices.
At Quarterpoint, a key part of our job description is inaction. The more we say no, the more we save our clients from mediocrity. If we have success, we will owe it not only to the investments we made, but just as much to the investments we didn't make.
It is not just money, it is your future quality of life we are responsible for. This mandate often requires us to "say no" as we hunt for the best investments.