We invest based on value investing principles with an emphasis on protection of capital. That involves buying things that we understand below their worth. We see stocks as part ownership in earnings and net assets of underlying businesses. We believe every business has an intrinsic value that is shaped by and changes with the interplay of market, management and luck.
Stock price – a manifestation of human emotions, while reflects the intrinsic value over long run, is like an emotional pendulum in the short run which often materially diverges from intrinsic value. We buy at or below intrinsic value and like seeing that value grow over time. We believe that the trio of our long term orientation, human emotions (fear) and institutional disinterest will keep giving us opportunities to do that.
We undertake dispassionate, independent bottom up business analysis for assessing intrinsic values. We realise that being a function of future free cash flows, intrinsic values are difficult to assess. We therefore limit ourselves to businesses that have competitive advantage in areas of our circle of competence and are run by able and honest management. Our assessment of management involves detailed study of capital allocation, corporate governance and accounting track record. Our process is oriented towards strongly avoiding companies with slightest evidence of corporate misgovernance, cash leakages, and lack of respect for capital cycles and minority interest.
Contrarian, Patient and Focused
Often things that we like – understandable businesses with competitive advantage and good management donot come cheap. However some times, owing to ignorance, dislike, temporary hardships, human biases or institutional reasons, prices get reasonable. If a careful analysis and long term orientation convinces us that market is mispricing the future long term fundamentals we love taking contrarian positions. Our past mistakes and long experience however reminds us to be humble and transact with margin of safety. However, till we find things that make sense, we are happy to remain in cash/ liquid funds. Also, when things that we own remain cheap and good we are happy to hold the businesses for very long term. Lastly, we run a concentrated portfolio of 15-25 companies and like giving adequate weight to our high conviction bets.
The Golden rule of Reciprocity is our governing principle. We put investors first in our incentives, conduct and communication. That is the way we ourselves would want to be treated if our roles are reversed.
Incentives: Our default fee structure is zero fixed fee with only performance fee (profit share). This lines up our well being behind our investors. We will do well ONLY if our investors do well. This forces us to invest and raise money only when it makes sense.
Conduct: We conduct our actions to ensure risk adjusted wealth creation for investors. We limit risk by (a) investing based on value investing principles within our circle of competence, (b) undertaking independent bottom up research, and (c) trying not to overpay.
Communication: The spirit of our communication with investors is the same that we would expect from anyone whom we have entrusted our own money – candid and transparent. In our communication with investors, mention of mistakes precedes accomplishments. We prefer telling bad news first.