Equity Portfolios

Philosophy

We are long-term, value-oriented investors. We build wealth by investing primarily in equity securities of good companies run by shareholder-oriented managers. We purchase the securities of these companies when (1) the market price is at a significant discount to our assessment of what the company is really worth and (2) when we expect the value of the company to grow. Securities purchased with such characteristics provide an investor with a margin of safety against permanent loss of capital. We sell when prices approach or exceed our assessment of value or when the value of the company begins to erode.

Equity Portfolios

We employ a value-oriented investing strategy in the equity portfolios we manage. Portfolios typically consist of 15-20 stocks that we carefully select based on our own research and ideas.

Turnover tends to be quite low—in a typical year we might buy and sell 2-4 positions. Our average holding period is measured in years. The minimum initial investment is $1 million in cash and/or securities.

Buy Discipline

We look to purchase the stocks of good businesses that have shareholder-oriented management. We want to see the stock trading at a discount to our estimated value and we want to see the business value growing over time.

Good business

A good business is one with unique competitive advantages that generates excess cash flow above that needed to maintain its infrastructure. Such a company may have more power to raise prices for its goods and services. It is even better when that company has a conservatively financed capital structure. While each of these elements is not present in every investment that we make, these are the characteristics for which we diligently search.

Shareholder-oriented management

Such managers make decisions for the benefit of all shareholders equally. Additionally, the team is oriented toward carefully allocating corporate capital to its best use. Managers are focused on becoming more efficient and more profitable rather than simply making the company larger.

Discount to value

We make an investment when the market price of a stock trades at a discount to our estimate of what the company is really worth. We generally use two methods to assess value. One way is to estimate the liquidation value of a company given private market transactions for similar assets and liabilities. Our other method is to use a discounted cash flow analysis.

Often, when a company’s stock price trades at a steep discount to value, our decision to buy runs counter to prevailing market psychology. Adherence to this process moves investing from an art to a discipline.

Growing business value

A company selling at a discount to value is not reason enough to make an investment. The company’s management team must be focused on increasing that value.

Sell Discipline

We generally sell a portfolio holding for one of the following reasons:

Stock price has reached fair value or overvaluation

When the price of a stock goes up to fair value it is time to sell. The prospect for further capital appreciation is diminished and, more importantly, the risk profile of the investment has increased. At times, we continue to hold stocks that are trading near intrinsic value as long as intrinsic value is increasing.

Business intrinsic value deterioration

The prices of common stocks fluctuate—sometimes widely—for a variety of reasons. While this may be disconcerting, we mostly do not worry about price fluctuations. Instead, we focus on changes in intrinsic value, which is what the company itself is really worth.

Although a declining stock price is not necessarily something of concern, a decline in the value of the actual company is another matter. Such occurrences may result from poor capital allocation decisions, permanent threats to future earnings power from an external source, or other reasons. We study these devaluations thoroughly and we may decide to sell the position based upon our findings.

  • The primary goal of value investors is to avoid losing money.

    — Seth Klarman