A Few Words on Our Investment Philosophy

16 Oct

A few words about the investment philosophy that is behind the postings on this site:

In most cases, we’re trying to determine what the value of a company is to a private market buyer in a negotiated transaction. But we’re not going to pay that price. We want to buy the company at a (hopefully large) discount from this value. After all, as a minority shareholder, we can’t have any influence on what the company does with its excess cash flows. That is, the cash beyond what is needed to sustain and grow the business given available reinvestment or new investment opportunities. A private market buyer would be able to go in and, say, invest in public securities or pay out the excess cash to himself. And thus he should have to pay more for this control. Sometimes, we can profit from this difference between our position and his. We look at adjusted book values, normal earning power, free cash flow generation, and other metrics to determine what a company is worth.

As Charlie Munger has said, “It’s not a competency unless you know the edge of it.” We can’t know everything, but we try to be aware of what we don’t know. We look for businesses we understand that are being run by honest, able managers whose personal stakes in the success of the company are high. If we can buy these companies below what they are worth, we should do reasonably well over the long-term.

We’re not worried about near-term market prices, just investment risk – something going wrong with the business. If we find value, we feel comfortable making a purchase and waiting for the market price to take care of itself. If the company’s management continues to create value by generating satisfactory incremental investment returns, the market price should rise accordingly, albeit non-linearly with intrinsic value. This is not to say that we aren’t concerned with market prices, we are just not focused solely on them.

Also, some ideas posted here are not meant to be long-term. These could be called “trades.” But such trades are taken with a long-term perspective.


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