Our philosophy & process
Our investment philosophy
FUNDAMENTAL INVESTING
The foundation of our investment philosophy is that growth of the free cash flows in our companies will drive long-term returns. This must be combined with a fair price.
INDUSTRIES
We don't like change. Growing industries with a low rate of development and high long-term predictability provides comfort.
BUSINESS FOCUS
Relentless focus on high-quality companies that can maintain business strengths and earnings growth at high incremental returns and carry out value-creating capital allocation.
INVESTMENT HORIZON
Our preferred ownership period is forever as long-term ownership creates the best long-term returns. However, this depends on the price versus the intrinsic value development of the business.
VOLATILITY
As we have high comfort with our companies we see volatility as an opportunity rather than a risk. When prices fall, the expected return in our companies will generally increase.
PORTFOLIO ALLOCATION
All allocation decisions are made based on an assessment of quality and expected return (IRR), which is why significant price fluctuations can lead to ongoing adjustments in the portfolio.
Our research & investment process
We say "no" to almost everything. The vast majority of companies fail our quality filter. This discipline is easy to describe but difficult to maintain. The main focus of our research process for any potential investment is to kill the idea, hence focusing on the risks of the business. As such, the majority of research time is not spent estimating upside. It is spent trying to destroy the investment thesis. The focus is on understanding how the business can be broken. Risks are uncovered using all available sources: expert networks, competitors, customers, former employees, and more. If we cannot kill the idea we become increasingly interested.
Once a company passes our qualitative filter, we construct an internal rate of return (IRR) model to assess what a long-term owner would earn at the current price. This is not a short-term price target. It is an estimate of the compounding journey over many years of ownership. Even the world's best business is a bad investment at the wrong price, and we are patient and disciplined. A company can sit in our investment universe of ~100 stocks for years, tracked and studied, until the price becomes interesting enough to enter the portfolio.
We focus on free cash flow - not accounting earnings. Our portfolio companies convert approximately 100% of their reported earnings into actual cash flows. This is deliberate as accounting earnings can be more easily manipulated. A high return on invested capital (averaging ~40% across our portfolio) combined with strong cash conversion and solid growth is the financial signature we look for.
Our portfolio is concentrated, consisting of 10-14 companies at any given time. Not because we lack ideas but because we believe deeply understanding a few businesses will beat superficially understanding many. When a business that meets our criteria can be purchased at an attractive price we want that insight to actually matter for ours and our investors' returns. A portfolio of e.g. 50 holdings is a confession: the manager does not know which ideas are the best. Why invest in your 24th best idea instead of buying more of your top ideas? Concentration forces intellectual honesty. When a single position represents 8-10% of the portfolio, you cannot afford to be lazy or sloppy. Every holding must earn its place and keep earning it. The greatest risk in investing is not volatility. It is owning something you do not understand. In our view, concentration reduces risk when it is the product of deep knowledge.
To learn more about our process, read about: