How We Invest

Investment Philosophy
Our guiding philosophy is built on four principles

  1. Invest in Businesses, Don’t Trade Stocks Investing is about allocating capital to businesses, not just buying pieces of paper As such we take on an owner’s mindset with each of our investments, asking ourselves which management teams we want to partner with in order to grow a business.
  2. Think Long Term, Don’t Try to Time Markets Short term market movements are impossible to predict, not only because of the vast number of variables one would need to get right, but because even if we could predict all those variables with certainty, we would still have no idea how markets would react to them.
  1. Be Concentrated, Don’t Overdiversify Great ideas and opportunities are rare and should not be diluted by average ones. As such, we concentrate our portfolio in our best ideas with the understanding that such an approach runs the risk of deviating significantly from the overall market in any given three-year period.
  2. Use the Market, Don’t Rely on It Market prices only reflect an opinion about underlying business value, and those opinions are prone to substantial errors in the short term. As such, we always reach our own opinion about a company’s value in isolation of what the market might think, and then we wait for the market to provide us with an opportunity to initiate or exit a position.

Investment Process
Real Intrinsic Value Recognition (RIVR)

What is Real Intrinsic Value Recognition (RIVR)?
RIVR is our disciplined, repeatable, and proprietary investment process. At a headline level, RIVR involves evaluating businesses as long-term owners would – we establish an underlying real value for the business itself, based on our expectations of its long term future.

RIVR requires us to answer two crucial questions before including a business in our portfolio

  1. Is this a high quality business?
  2. Is it trading at an attractive price relative to its real value?

To answer these questions, we must fully understand a company’s industry, business model, economics, management, culture and financials This process can take anywhere from two to six months in which we are analyzing relevant data some of which is qualitative in nature and some of which is quantitative.

DATA SOURCES
QUALITATIVE QUANTITATIVE
Company history Revenue model
Strategy Financial structure
Management Capital requirements
Culture Addressable market
Competitors Liquidity requirements
Competitive advantage/ Moat Reinvestment opportunities
Customer relationships Profitability
Industry dynamics
Regulations

Investment Process
Real Intrinsic Value Recognition (RIVR)

  1. Is this a high quality business?Understanding that what really makes a high quality business is not only its past returns but its ability to continue generating those returns into the future.As such, a high quality company must have an identifiable moat or competitive advantage something structural that prevents competition from eroding profits and returns over time.However no amount of historical financial data can determine the future defensibility of a moat That can only be understood through qualitative analysis of the moat itself To do this, we need to understand the source of the moat in order to assess its strength Moats come in many forms such as
    • Network Effects the value of a service grows as more people use it
    • Economies of Scale being the largest player creates better economics
    • Switching Costs – customers stay with a company because switching would be too expensive
    • Cost Advantage – being the low cost producer in a commoditized space
    • Brand having the most desirable product on the market
    • Regulations regulatory imposed barriers on competing in a market
  1. Is the business trading at an attractive price?Once we have determined that a business is high quality, the
    next step in our RIVR process is to establish what the business itself is worth to us as long term, owner oriented investors It is important that we come to this valuation in isolation of wherever the market is currently valuing the business a concept foreign to much of the investment industry who typically base their estimation of value based on current share prices and market information In reality current share prices rarely reflect real intrinsic valueIt is only our estimation of the value of a business that enables us to determine if the current share price presents an attractive investment opportunity or not To do this, we focus on the long term economic profits (cash flows) we stand to receive as shareholders, based on our assessment of the quality of the business We model these returns with a detailed discounted cash flow analysis using explicit forecasts at least ten years out