How We Invest

Our Investment Approach is Genuine Investment
Genuine Investors focus on businesses, not stocks

Business Value Stock Price

Business value is derived from the cash flows that can be produced for the owners in the future.

Those prospects change little quarter to quarter.

Stock prices are derived by business value AND many other immaterial factors which are both short term and unpredictable.

E.g. news, sentiment, emotions, flows, value of other stocks/ assets, accounting rules

Business value =   Business value

Stock price  =   Business value AND Many other variables

What does this mean in practical terms?

  • Think like a business owner: focus on the underlying economics of the business.
  • Take a long- term view: remain fully invested. If you can’t time the market, the best place to have capital is in great businesses.
  • Run a concentrated portfolio: why dilute great ideas with average ones?
  • Use the market- don’t rely on it. The market provides opportunities, but not reliable information about business value.

The Genuine Investment Process:

We need to answer two questions :

  1. Is this a high-quality business?
  2. Is the stock trading at an attractive price relative to business value?

1. Is this a high-quality business?

This is a very difficult question to answer- it requires a very deep understanding of a company, their product and their industry.

A truly high-quality business doesn’t just have good historic returns, it must have an identifiable moat or competitive advantage – something structural that prevents competition from eroding profits and returns over time, and it needs to be well managed.

No amount of historical data can determine the quality of a business, or the future defensibility of a moat. That can only be understood through qualitative analysis. Reported numbers only get you so far- they will never tell the whole story.

To really understand a business requires huge amounts of qualitative research: culture, management, company, industry, employees, competitive advantage, regulation, etc.

2. Is the stock trading at an attractive price relative to business value?

It is only once we have a very deep understanding of a business that we can even begin to appropriately value it. And even then, we remain aware that valuation is not a precise science.

Given our deep knowledge of companies, we are able to forecast future earnings much further than others- often 10 years+. This is where the vast majority of company value lies. Using a DCF (as a business owner would) we can then determine the intrinsic business value.

All of our valuation work is carried out independently of the market. Relative valuations, or metrics/ ratios/ multiples based on misleading reported numbers are of little  use in Genuine Investment.

Once we have estimated the business value, we compare that to the stock price. This approach allows us to calculate an IRR for every position- something incredibly useful when it comes to portfolio management.