INVESTMENT PROCESS 2018-05-03T14:18:55+00:00

Avoiding permanent capital impairment

The prerequisite to achieve compounding is to never permanently impair capital. We have designed our investment process to both protect capital from such impairment and to select companies with the highest to compound returns over long periods of time.  Our high level process is shown below.

Emphasis on negative and positive selection

Eliminating risk is as important as picking winners. In order to create wealth for our clients, it is imperative that we first reduce the probability of capital impairment through negative selection. Picking the best performing stocks on the market would not create wealth if we also picked the next Steinhoff or Enron. We therefore first eliminate companies with ESG, accounting, M&A and capital allocation risk and then build our portfolio. The process is shown below.

Emphasis on negative and positive selection

An Appreciation Economic Moats and Behavioral Biases. Our goal is to appreciate the intrinsic value of a quality company by incorporating the longevity of its economic moat (competitive advantage) directly into our estimation of value. The intrinsic value is then used to determine whether a behavioral bias exists in the market based on extremes of this valuation.

Understanding When The Philosophy Does Not Work

In our analytical interrogation of our philosophy, we find that high quality companies outperform the market approximately 70% of the time. While the strategy is very capable of taking an investor through the full economic cycle (most strategies take investors only up to the peak of the cycle), there is a portion of the cycle where it is likely to underperform. This is when GDP growth peaks (or is expected to peak) – at this point, stock prices of lower quality companies grow faster than their high quality peers because their profits are more leveraged to economic performance.

Click here for the full writeup of our investment philosophy

Click here for the full writeup of our investment process