How We Invest
We consider ourselves long-term, patient, contrarian value investors. Our investment process aims to reflect these qualities. We have a disciplined, consistent approach.
We believe that the best opportunities can often be found where the majority doesn’t want to look. We search for out-of-favor companies which are currently disliked by the market, often because they face temporary challenges. We are willing to look beyond these uncertainties as long as we have reasons to believe that not only are these companies strong enough financially to survive their current challenges, but also are likely to perform well in the future.
Typically, our picks have already underperformed long enough to have discouraged the majority of investors’ capitulation. The stocks respond less and less to bad news, while negative market sentiment and media headlines lead to continuing downgrades and very few “buy” recommendations among Wall Street firms.
Is it value?
Once we have identified potential contrarian investment ideas, we want to test their “value” based on various metrics. We look at multiples of sales, current earnings, future earnings, cash flows, free cash flows and the probable or intrinsic value of the assets. We compare these metrics to those for the market as a whole, those of the company’s peers, and to historical levels for the company (remembering that the fundamentals might have changed).
Since we intend to hold our investments for a few years, we need to have a good understanding of future growth in sales, earnings, and cash flow. To make sure our expectations are realistic, we try to measure the total addressable market for the company’s products or services. From there we can form a reasonable estimate of the company’s attainable market share. We also identify growth drivers and sources of future margin improvement or erosion (costs, pricing power, economies of scale, etc.)
We accept that uncertainty about the future is an integral part of investing. Potential surprises may be good or bad but, by definition, they cannot be predicted. We only want to try and understand what they might be their potential impact on the business, and our assumptions should they materialize.
Volatility is our friend
We don’t mind price volatility in our holdings or in the overall market. In fact, we see it as an opportunity that leads to attractive valuations for desirable investments. What we do try to avoid is real risk, i.e. a permanent loss of capital.
Since volatility is essentially psychological, prices often go higher or lower than is rationally possible to anticipate. As a result, we tend to buy and sell incrementally, aiming to achieve an attractive average price.