We believe that all investors will require a disciplined set of best practices in their investment regimen. Here are the practices that we have found to be helpful in our investing careers:
Analytical foundation - The key goal of an investor is to assess the annuity producing value of an organization to determine its intrinsic value. Compounding growth companies are unique in the sense that their earnings tend to grow with their valuations, creating a durable annuity value that can withstand many environments. It is for this reason we gravitate toward sustainable growth companies.
Flexibility - Market environments will change and fluctuations are to be expected. Being flexible means identifying trends that can supersede all these environments while being open minded about the possible companies that will benefit from these themes, and therefore generate winner take all effects. While our portfolio has a low turnover ratio, we do make modifications when the opportunity warrants it.
Opportunistic - At times, markets will undergo severe dislocations that prove to be temporary. We call this phenomenon “the market climbing a wall of worry.” We use these critical junctures to make our best purchase decisions, as often at these junctures, compounding growth companies can also be purchased at below intrinsic valuations. This produces a double tailwind: First as the stock recovers and second as compounding growth resumes again. These opportunities are rare, but not to be missed.
Management Decision Making - Often the best way to evaluate management decision making is through capital allocation decisions of the past, whether these be an acquisition, a share buyback strategy, or a reinvestment into the organic growth of the business. Ultimately time will tell as the results of these decisions play out, but oftentimes past decisions will provide a set point as to how future decisions may be made.
Business Model Analysis - The companies we hold tend to be unique in their industries and sport investable catalysts that are unique to their growth trajectories. Every investor will approach this area slightly differently, but we believe that over time, unique business models in niche industries will gain momentum and be recognized by mainstream investors.