Our Investment Philosophy

I’m a professional investor, and I actively manage on behalf of my clients, focusing on publicly-traded equity securities. Below are the main points covering my thinking on investing.

Primary Emphasis is Risk Management: My North Star will always be risk management, which I define as the chance of permanent loss of capital. Permanent loss of capital tends to come from impairment of business operations, deterioration of the balance sheet, poor management allocation of capital, or investors overpaying for a company. The investing public, academia, financial journalists etc. like to pay attention to price volatility. That tells us little to nothing about risk, as we try to be long-term focused. If anything, volatility is an opportunity for truly long-term oriented investors, giving them more bites at the proverbial apple.

Be Disciplined with Valuation: One of the best ways to minimize risk and increase future returns is to have a relentless focus on valuation. I consider myself a value investor, and seek to purchase companies for less than they are intrinsically worth; a dollar for fifty cents as Warren Buffet so pithily put it. Not overpaying for shares of securities helps avoid buying into bubbles or speculative markets, which are risky and can result in substantial and permanent loss of investor capital, the primary thing I seek to avoid.

Focus on Cash Flow Over Earnings: I come from an accounting background, and the cliché is true: earnings are an opinion, cash is a fact. There are simply too many legal and otherwise ways to manage and manipulate corporate earnings, and it’s tougher to do that with Cash Flow. A company is intrinsically worth the value of future cash flows (not earnings) discounted back to today, management deploys cash (not earnings) for their company the way they best see fit, investors wait for dividends (cash not earnings) to hit their brokerage accounts…well, you get the idea.

Financial Stability is Key: Much attention is paid to profitability, the next quarterly earnings report. We take interest in the balance sheet, which accountants will tell you is where the bodies are buried. For example, a company with adequate cash compared to liabilities, and minimal debt compared to equity is a company we might seek to invest in. Companies with rock-solid balance sheets may not get the sexy headlines, but they are built to withstand macro and microeconomic headwinds. Any business can have a few good quarters or years or have the hot new product. But if they have excessive liabilities, they are vulnerable to economic cycles, and debt service will crowd out R&D, growth, buybacks, etc.

Management Should be a Plus: I seek out companies run by competent, shareholder-aligned executive teams. I want to see what they do with shareholder capital over time: what is their rate of return on acquiring new businesses, repurchasing shares, investing in operations, or raising new equity? Do they value growth for growth’s sake, or do they focus on shareholder value? People get confused with growth and increase in value, and they can be conflicting goals. Finally, are they ethical in their dealings? They’re executives, not saints, but they need to steer clear of consistent legal and regulatory troubles, adverse audit opinions, etc.

Short-Term Skepticism, Long-Term Focus: The movement of markets and stock prices is all but impossible to predict in the short and medium term. Earnings surprises, general market selloffs, movements in interest rates, etc. all conspire to make securities prices jump all over the place at any given time. This can make the prices of any security wildly mispriced in relation to what it’s actually worth at any given time. This is an opportunity to find the types of companies I look for at bargains, as well as selling for a particularly attractive price in frothy markets. However, in the long term, prices tend to converge on intrinsic value, which is why I like to purchase shares in companies I’m happy to hold for years if not decades.

Random Thoughts:

• I’m an entirely self-taught investor: I’ve spent years educating myself on investing and developing my own philosophy. The truth is that mindset and patience are more important to long-term success than the specifics of your philosophy. Tons of investors and advisors out there with different approaches than me are doing great work and will have well-deserved success!
• Keeping a clear head is easier when you don’t need the funds for at least several years – if you do, don’t put them in the stock market! As long as your strategy makes sense to you, you stay calm during times of volatility, and stay in it for the long-term, it’ll all likely be worthwhile.
• Diversification makes sense…to a point. Any position in your portfolio under a certain level – I’d say two to three percent of total value – has a hard time being a real difference maker for the whole group. Plus, I like to understand each company in the portfolio, and that gets tougher as the number of companies you have to keep track of grows. Rule of thumb? 15-30 companies sounds good to me.
• You may have noticed I haven’t said anything about macroeconomics, interest rates, etc. That’s because I don’t spend much time thinking about it. Businesses are tough enough to analyze and purchase. Trying to predict macroeconomic and monetary trends always struck me as darn-near impossible, I’ll let smarter folks than me grapple with that.

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