photography by Collier Black

Identify Good Businesses

INVESTMENT PROCESS

KEY TENETS

ABSOLUTE TRUMPS RELATIVE
  • Do not overpay.  When necessary, invest patiently.
  • Seek to limit permanent losses to capital. 
  • Focus on high-quality businesses that can be valued with a high degree of confidence.
RISK REQUIRES COMPENSATION
  • Require an adequate return relative to the risk assumed.
  • Act opportunistically.  Take risk when sufficiently compensated.
PROCESS REWARDS CONSISTENCY
  • Maintain consistent investment process despite pressures to conform.
  • Do not sacrifice investment standards to manufacture opportunities.​

Good Business

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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:

  • Discounting free cash flows (DFC)

    • Discount rate 10-15%

    • Normalized free cash flows

    • Growth rate 2-5%

  • Discount to NAV/balance sheet valuations

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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.  

SELL DISCIPLINE