We don’t “buy and hold.” We buy and optimize.
Identify the right companies.
We believe the single most important decision we make is choosing which of the thousands of public companies deserve our ongoing time and attention. We strive to identify highly intelligent companies—sound businesses with strong, honest management that drive their Business Value higher over time. If you look at all public companies through this lens, we believe most do not pass.
Get to know the companies extremely well and determine Business Value.
We spend considerable time and effort assessing the risks and opportunities available to each company and incorporate those assessments into a financial model to determine its Business Value. This value roughly coincides with the price a buyer would pay for the entire entity—we are not trying to be conservative; we are trying to get it right. We also pay attention to company financial leverage and believe the price of an investment is the biggest risk factor. While developing a view of value requires a great deal of effort, doing so prepares us for events that inevitably occur (either market-related or specific to the company) that cause meaningful changes in company share prices.
Diversify, but not too much.
In theory our optimal portfolio is diversified over approximately 25-30 companies in largely unrelated industries, with the size of each holding determined by many factors—the most important being how attractively priced it is.
Don’t sit back and put your feet up: continuously optimize.
Changes in the relative weightings over time are primarily driven by our response to changes in company traded prices. The cheaper a company gets, the more of it we want to own; the more expensive a company gets, the less of it we want to own. We believe risk and return can be inversely correlated.