photography by Collier Black
INVESTMENT PROCESS
KEY TENETS
ABSOLUTE TRUMPS RELATIVE
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Do not overpay. When necessary, invest patiently.
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Seek to limit permanent losses to capital.
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Focus on high-quality businesses that can be valued with a high degree of confidence.
RISK REQUIRES COMPENSATION
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Require an adequate return relative to the risk assumed.
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Act opportunistically. Take risk when sufficiently compensated.
PROCESS REWARDS CONSISTENCY
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Maintain consistent investment process despite pressures to conform.
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Do not sacrifice investment standards to manufacture opportunities.
Good Business
Profitable
Predictable Free Cash Flow
Strong
Balance Sheet
300 name possible buy list
Established companies up to $10B market cap
Good Price
After determining whether it's a good business, we ask,
"Is it selling at a good price?"
Unique Valuation Methodology:
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Discounting free cash flows (DFC)
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Discount rate 10-15%
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Normalized free cash flows
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Growth rate 2-5%
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Discount to NAV/balance sheet valuations
Stock reaches calculated valuation
Valuation adjusted below stock price
Combination of operating and financial risk
Position can no longer be valued with a high degree of confidence
avoid adding to positions with declining valuations
Definitions
Free Cash Flow: Cash from operating activities minus capital expenditures.
Discounted Free Cash Flow (DCF): A valuation method used to estimate the value of an investment based on its future free cash flows. DCF determines the present value of expected future free cash flows using a discount rate, or required return.