Investment Philosophy
We believe there is a vital distinction between investment and speculation, even when markets blur this line. Investment is like a farmer who buys good land because he has studied the soil, drainage, rainfall history, and crop yields, then only pays a price that makes sense relative to the harvest he can reasonably expect over many seasons. Speculation is bidding an ever-higher price for the same field simply because the neighbour’s plot just sold for more, without ever checking whether the land can grow anything at all. We invest in businesses; we do not speculate on prices.
Our philosophy is supported by four guiding principles: think long-term, keep things simple, price matters and protect integrity.
We think long-term because great businesses compound value over decades, not quarters. We keep things simple because complexity is often the hiding place for risk and can be a catalyst for errors. Remembering that price matters ensures we never lose sight of the farmer’s discipline – paying only what we can reasonably expect future harvests to justify. And we protect integrity, ours and that of our clients, because trust patiently built over years can be lost in a moment, and without it nothing else endures.
Investment Process
We seek companies that we can reasonably expect to exhibit high returns on invested capital long into the future. High returning companies that reinvest into their businesses at high rates of return can harness the power of financial compounding. We prefer companies that have either a strong track record of high returns or companies where returns have faltered, and management are taking the necessary steps to revive the financial success of the business. High returning businesses typically generate strong cashflows which enables internal reinvestment and the payment of sustainable and growing dividends to shareholders. We use third-party financial software, with a database of over 16,000 global stocks, to screen for companies matching our target profiles.
Once identified, we undertake proprietary fundamental analysis – a fact finding deep-dive into the company and the markets in which they operate – to understand how the business operates and on what basis it competes. We divide this analysis into two parts: qualitative and quantitative.
Qualitative analysis includes an assessment of business model, market structure, market position, management, pricing power and competitive advantage, amongst other factors. Quantitative analysis involves scrutiny of financial statements and the construction of discounted cash flow (DCF) models, where necessary, to consider our understanding of value.
The investment team debates the findings and considers if the current market price ultimately offers a compelling long-term investment opportunity based on reasonable expectations about the future.
This is a continual, iterative process.
