PHILOSOPHY
Our principal lens for everything we do is the long run
We are long-term investors because we believe that investment is a commitment of time as well as capital. We measure the long term in years, not days or even quarters. In the end, we believe that being focused and disciplined about the long run reduces short-term issues.
Our long-term perspective leads us to build enduring portfolios with shareholder-rewarding businesses at attractive values and to own them for as long as practical. We invest in businesses that align with our values and the needs of our client investors.
- We believe investors should be rewarded for their capital with income and growth.
- We believe long-term investing requires the identification of enduring businesses.
- We believe not all assets, industries, and management teams are created equal.
- We believe well managed businesses understand that their constituents matter.
We believe equities offer a superior long-term opportunity
In our view, public equity markets offer the best long-term return on invested capital of all major liquid markets, including bonds, cash, commodities, and real estate. The combination of income production from profitable operating businesses and their ability to positively capture inflation and productivity gains are compelling reasons to favor equities over the long term.
Traditional bonds and cash produce income, but the terminal value of the investment is at best fixed. Inflation destroys the purchasing power of traditional bonds and cash, which cannot capture higher prices. If inflation is 2% in a year, a $100 corporate bond bought today will buy only 98% of goods next year after inflation erodes its purchasing power. Alternatively, an operating business that sells $100 of goods today will, on average, charge $102 next year for its products.
Commodities may increase in value with inflation but they don’t, by themselves, produce income or benefit from improvements in productivity and they have to be stored, which is a cost.
Lastly, while real estate-operating businesses produce rent incomes, which can grow with inflation, real estate investment trusts have underperformed equities for a number of reasons including low net rents, low capitalization or discount rates, high financial leverage, and periodic over-building.
Of course, it is prudent to separate short-term needs from the long-term and invest appropriately. For clients who have short- and intermediate-term liquidity needs, we believe equites do not make sense.
We invest—we don’t trade
We are long-term investors in businesses we believe will be around for the long term. We use quantitative and qualitative approaches to identify businesses that demonstrate operational stability, conservative balance sheets, excellent management teams, repeat customers, and growing markets. We expect our businesses to be better than their competitors, to return capital to their shareholders, and to act in the best interests of their customers, employees, and communities.
We focus on income and growth
We view dividends as cash-certain returns on investment and the growth of dividends as protection against inflation. Enduring businesses should produce excess profits that can be used to pay consistent dividends and to take advantage of growth opportunities. We view dividends as evidence of a company’s commitment to its shareholders and its confidence in the future.
We believe the market is occasionally wrong about value
Once we identify an opportunity set of enduring businesses, we value them using our proprietary two-stage methodology. We believe our process is different from and more usable than traditional approaches. We expect that from time to time, the market and individual businesses will move between undervalued and overvalued and that individual companies within the market will move between relatively undervalued to relatively overvalued. We think of this as a tidal process and we count on reversion to mean valuations over time.
We view portfolio construction as an opportunity to manage risk
The assembly of our portfolios balances our views on multiple variables including valuation, income production, and growth. Our challenge is to optimize a portfolio’s average value for each variable relative to the market. We utilize a price correlation matrix to identify mathematically instances of risk aggregation and we look for co-exposure to macro factors, such as commodities and interest rates that may impact our portfolios within sectors and industries. We self-impose limits on portfolio purchases to 3% of portfolio value and 5% of portfolio income and consequently expect to own 40 to 50 businesses.