INVESTMENT PHILOSOPHY
Investments as partial ownership in real businesses
We consider equity investments as partial ownership claims on real businesses. We recognize that value creation is the result of enduring productive enterprise that creates added value in fulfilling a market need.
Fundamental research & analysis
Rather than attempt to predict macroeconomic variables or time the market, our investment process is predominantly bottom-up, focused on internal company-specific fundamental research & analysis.
A focus on high-quality companies
As long-term owners of participations in real businesses, our focus is on owning 20 to 30 high-quality companies: durable businesses with a proven ability to add value, as interpreted by the level and consistency with which they earn a return on invested capital in excess of their capital costs.
Stewardship and alignment of interests
Such businesses must also be led by corporate officers who act in the best interest of long-term shareholders, as their actions ultimately have a large impact on the monetary value of the companies they manage. We therefore analyze their track record of capital allocation decisions, as well as incentives and remuneration.
Valuation discipline
We strive to acquire such high-quality businesses at a suitable margin of safety relative to our own fair value estimates, thereby minimizing the chance of permanent capital losses. We typically trim our positions as prices converge on fair values, and sell our stakes if prices become unreasonably high.
Long-term investment horizon
We strive to adhere to a long-term investment horizon, in recognition of the fact that capital appreciation is mainly driven by the power of compounding reinvested earnings over the long-term. Moreover, closing the gap between the current market prices and intrinsic values can take time, sometimes measured in years. A long-term investment horizon also helps isolate transitory events that can negatively impact results, and acts as a key factor in the convergence of economic and moral choices.
Market inefficiency
Markets inefficiencies do exist, and we typically target less efficient markets. For instance, as most market participants are fixated on the near-term, our long-term focus places us in a less competitive space. Likewise, our global scope enables us to look for opportunities in foreign markets where other investors aren't as attentive. Given our relative small size, we also place a measured emphasis on smaller capitalization companies, a less competitive segment of the market due to the absence of larger institutional investors. And more broadly speaking, unexciting businesses, oftentimes found in fairly mundane places, are more likely to be mispriced.
Risk control
In accordance with our primary objective of capital preservation and appreciation, risk control is one of the cornerstones of our investment philosophy and process. While it's comparatively easy to make above-average gains by taking excess risk, especially in buoyant markets, the real skill is to generate superior performance with risk firmly under control. Over time, this leads to more consistent investment results across market cycles and superior risk-adjusted performance.
Risk control does not mean risk avoidance. To generate superior performance, one has to take risk. The key is to bear risk intelligently in the pursuit of investment returns. We focus on taking idiosyncratic risks that i.) we can understand and assess in a probabilistic manner, ii.) represent a clear risk/return asymmetry, and iii.) we can adequately diversify in a portfolio construct.
WHY WE OWN GOLD
Our ownership of physical gold is motivated by two main considerations:
First, to own a hard currency in reserve that adequately acts as a store of value. And second, to create a potential hedge against the myriad risks facing investors today. This includes the frailties of the global monetary and financial system, of which inflation is a manifestation; as well as geopolitical turmoil.
Over the years, we’ve become increasingly convinced that gold is arguably the most compelling form of hedge against such risks, as evidenced throughout history. This is due to its inherent characteristics, which can be summed by the notions of scarcity, permanence, and independence. In various ways, these properties enable gold to preserve its purchasing power over the long-term, and tend to make its price dynamics counter-cyclical.
As a result, we see gold as both a hard currency that we can hold in reserve and exchange for other assets as opportunities arise, as well as a permanent stabilizer and counterbalance to our portfolio. The vast majority of our exposure to precious metals takes the form of physical gold, which we complement with a much smaller amount of precious metals companies and physical silver.