Investment Philosophy

My investment philosophy is that of a business owner. In this regard, I am strongly influenced by the words of Benjamin Graham:

 “Investment is the most intelligent when it is the most businesslike.”

I believe that taking the perspective of the business owner brings competitive advantage to capital allocators, business managers and fund investors. This is why my philosophy can be summed up as:

“Investing like an owner in businesses run by an engaged and rational owner with the capital of investors who think like an owner.”

Taking the perspective of a business owner helps the capital allocator to focus on what is important to an investment case and blend out the noise. As a business owner, I:

• Seek companies that provide a superior return from owning them rather than trading them.
• Take a long-term perspective on investing and don’t mind buying a great business when the short-term outlook is troubled or, heaven forbid, there are no “catalysts”.
• Don’t mind making decisions that may look stupid in hindsight. My goal is not to climb a career ladder, but buy great businesses when they are cheap, i.e. when people are saying you should not touch them with a barge pole.
• Think about valuation in terms of owner returns, made up of the dividend yield and earnings growth, rather than fair values at which a business can be sold.

I also find that companies whose managers either are owners or have the perspective of owners have a competitive advantage over companies that lack ownership. Managers who think like owners:

• Are focused on creating value in the long term, and, will happily take costs upfront if the payback is attractive further down the line. If this means, earnings are depressed for a few years, so be it.
• Are indifferent to the daily quotations on the stock exchange as they have no intention of selling a business they feel a strong emotional attachment to. However, every now and again it comes to their attention that a company they think highly of is on sale at a ridiculously cheap price. When this happens, they buy.
• Are happy to do something contrarian when it makes sense even if it makes them look stupid with hindsight.
• Avoid disaster at all costs. Leverage is very low and often times there is a substantial cushion of net cash. If it is a financial company, the equity ratio is multiples of the most leveraged competitors.
• Are skeptical of big bang acquisitions and the synergies promised by consultants. They prefer to build new businesses organically. This may take longer but it entails lower risk and creates opportunities for advancement for employees.

Finally, I think investors which consider themselves part owners of the fund creates a competitive advantage. Investors who think like owners:

• Encourage their fund manager to be contrarian as they understand that whilst a contrarian point of view is no guarantee of success, swimming with the crowd is a guarantee for mediocrity.
• Judge their manager based on the consistency to the investment approach rather than quarterly performance.
• Increase their investment when the outlook is bleak as they understand that this is when prices are most attractive.