Our Philosophy

We are value investors

Value and Growth are terms which get thrown around a lot when one describes an investment strategy or philosophy. Are there only two ways? Why does it seem that even the professionals don’t agree on what these terms mean?

What is value investing?

Value investing has evolved over the past century. Benjamin Graham was the father of value investing. His books, Security Analysis and The Intelligent Investor, outline the philosophy of how to evaluate an investment security as well as how to value it. In the 1930s, the stock market looked very different from today. Analysts and interested participants did not have instant access to the latest information. Some stocks could be purchased at a discount to the asset value of the company. The bottom line is, what worked then does not necessarily work now.

Value investing, first and foremost is taking the perspective that owning a stock is taking an ownership in a company. That is why stocks are called equities.

To be a value investor is to begin with understanding the fundamentals and economics of the business and to buy when the investor believes a margin of safety exists. Why a margin of safety? It is impossible for anyone to know all of the potential information about a company. An investor may also be wrong about some of their assumptions. Therefore, buying with a margin of safety provides the investor with the ability to be wrong to a certain extent without losing their investment – hopefully.

Value Investing in Practice

There are many ways to successfully make money as an investor. Value investing is not exclusive. For one to be successful at it, it requires a certain temperament – patience. Benjamin Graham was an adjunct Professor at Columbia University in New York. His most famous student, Warren Buffett, graduated in 1951, and used Graham’s techniques to amass a fortune. Many other graduates from Columbia University and their value investing program have gone on to become billionaire investors such as Mario Gabelli and Leon Cooperman.

After Warren Buffett and Charlie Munger became business partners, Munger influencing Buffett in evolving his thinking from buying statistically “cheap” stocks to buying great businesses at a reasonable price.

Columbia Business School’s program has also evolved through the years with Bruce Greenwald updating the original teachings and teach investors how to think about companies which require very little assets to generate huge amounts of cash. How to evaluate and quantify barriers to entry for a company. Lastly, how to evaluate an investment from a perspective of returns and not absolute value.

Selection Process

As we have discussed in the paragraphs above, value may come from various areas. While rare these days, a company may be selling for less than their liquidation value. A company have hidden or misunderstood assets. Accounting rules may be masking the true value of a business.

We may buy a stock for any of these reasons. Yet all follow the same process.

Strategic Analysis

Industry

Company

Products

Competitive Analysis

Barriers to Entry

Do they exist?

Qualitative and Quantitative

Customer Captivity

Pricing Power

Valuation

Asset Value

Earnings Power Value

Capital allocation and growth

Investment through the lens of potential returns

Analyze current price by historical market multiples

Selling

Selling is much harder than buying. Account type makes a huge difference as well when deciding whether to sell an investment. Generally, we will sell an investment if we believe there is no longer a margin of safety for returns or if we find another idea we like or believe we understand better.

Opportunity Strategy

For more information about our investment portfolio, please click here.