Investment Process
Idea Generation
We do not possess any rare alchemy for generating investment ideas. Ideas are formed from independent thought and analysis and through regular dialogue with like-minded and trusted peers. With such a large investment universe and a goal of concentrating the portfolio in our 10 best ideas, our focus remains on staying disciplined and saying no to the many ideas that do not meet our criteria.
Research Process
Research is bottom up where we spend focused uninterrupted time learning to understand the value and competitive dynamics of the business. We look to answer four overarching questions in the affirmative before making any investment:
1. Will the business be thriving in ten years time?
2. Does the business possess a competitive advantage and are they building it over time?
3. Does management have integrity, talent and are they leading by example?
4. Is the business selling for an attractive price?
If we are confident a company meets this criteria then we will move to going through full fundamental and behavioral checklists to uncover any flaws in our understanding. Lastly all research is documented with a clear outline of our thesis and a decision journal outlining the circumstances when we made the decision and exactly what is expected. This creates the ability to avoid hindsight bias and get clearer feedback on decision making.
Portfolio Management
The Portfolio is concentrated with an aim to hold no more than fifteen companies with the majority of capital invested in our top ten ideas. If we are fortunate enough to identify a business that can compound our capital for many years then our ideal holding period is forever. We look to initiate positions in great businesses at fair prices and then opportunistically take advantage of the stock market to increase these positions when prices are well below intrinsic value. Overtime these business should persistently increase the underlying value of their per share equity and this will be the main driver of our portfolio returns.
Work Environment
To successfully implement our long term philosophy we have constructed a physical work environment that is as conducive as possible to minimising outside influence and 'noise' and allows us to more easily maintain focus and independent thought. This is achieved through blocking out uninterrupted time to research and physically living and working outside of a major city where our commute to work is short and enjoyable, the atmosphere of our environment is very calm and we have easy access to nature and the natural environment.
Competitive Edge
Despite accepted academic wisdom that markets are always efficient we believe it is obvious that there are at times very wide swings between price and underlying intrinsic value of publicly listed businesses, this is especially when your investment time frame is long. We are able to exploit our behavioral and time frame competitive advantages through the structure of our fund, the work environment we have set up and through partnering with investors who share our long term philosophy. Investing in this way is just not possible in the wider money management industry as it requires patience, long periods of inaction and the ability to focus on the underlying business as opposed to its short term market price.