Generating attractive investment returns over the long run is
hard. So why do we think we have a shot at getting it right?
We think it boils down to aligning the investment
strategy with the right investment process, having a team of
people with the right mindset, creating a structure that is
consistent with our objectives and building a culture that
reinforces and cements all the above.
We believe that while in the short-run, investment returns can be driven by changes in sentiment, valuations or cyclical factors, long-term compounding requires investors to recognize companies that have the ability to earn an attractive return on capital and the ability to reinvest capital at an attractive rate of incremental return. This requires companies to have not just strong and sustainable competitive advantages but also large markets to tap. Sources of competitive advantage may include network effects, high switching costs, strong customer brands, niche markets and economies of scale and we look for companies with these elements.
An outstanding entrepreneur and management team, in our definition, combines strong domain knowledge, a long-term view, the drive and energy to succeed, strong capital allocation skills, and an ability to create the right organization culture. Most importantly, we like to back entrepreneurs whose motivations and incentives align with those of minority shareholders and those who treat all stakeholders fairly.
We believe that while markets are largely efficient, a long-term view and willingness to look through short term issues and market volatility can create interesting risk-reward opportunities. Hence, we will focus on listed opportunities while keeping the option to selectively look at things in the private markets.
We are value-oriented and don’t want to chase price, yet we are not bottom fishing value hunters and are prepared to pay a fair price for a high-quality business. We believe in reversion to mean and look for opportunities where there is an asymmetric risk-reward trade-off.
We intend to own a concentrated portfolio of 15-20 positions and our aspiration would be to increase ownership in our core investments over time as they deliver. We are not focused on measuring ourselves against a benchmark index and our portfolio construction and sense of risk-reward are not informed by a desire to track the benchmark.
While investment outcomes are what get measured, we firmly believe that good investment process is what counts. Our investment process is rigorous, and we spend time and effort to diligence a business much like private equity investors. While we must rely on publicly available information on the company, we corroborate that with extensive primary effort by reaching out to industry experts, ex-employees, competitors and others in the supply chain. We will not initiate a position in a company unless we have spent time with the entrepreneur / CEO and can share in their vision for the business. However, we strive not to limit our discussions with the company to the entrepreneur / CEO alone, preferring to meet multiple people across the company to understand if the strategy and culture as espoused by the management is truly reflected across the organization.
We think investors generally underestimate reinvestment risk and hence we will have a bias to hold our investments for longer. We do not have any unique capabilities in reading or predicting short-term market movements and our investing is not based on identifying these trends. We do not seek to manage short-term volatility and do not subscribe to the theory that volatility is a measure of risk in the portfolio. Risk for us is the probability of permanent loss of capital. Our ability and willingness to take a long-term view is our advantage.
At the end of the day, we believe that successful investing is driven by the ability to shape our behavioral responses and avoid succumbing to emotions of greed and fear. Instead, we must develop deep conviction and be prepared to act on them in times of distress. We have to live through long periods of inactivity, if required. We have to tolerate and live through periods of underperformance when measured against the market. We must recognize and accept mistakes and change our views if the facts change. Assembling a team of people that understands this and a culture that reinforces such behavior can help at trying to get better at avoiding the many biases we all suffer from, and thus can be a long-term competitive advantage. It isn’t easy but we at least know what to strive for.
We believe, a capital structure that allows us to take longer term bets without fear of short-term redemptions and an investor base that is aligned with us to play the long game, are in themselves a competitive advantage. We hope this will, over time, allow us to act with conviction in times of market distress and create superior investment outcomes.
We recognize that the culture we build in our firm will ultimately shape our behavior and allow us to succeed in our objectives. We value personality traits of integrity, diligence, passion for excellence, intellectual curiosity, discipline, and teamwork. Our working style is relaxed and informal, but uncompromising when it comes to the quality and rigor of our work. We like to practice the principle of “Strong Opinions, Weakly Held”, and encourage healthy internal debate. We are transparent and aligned with our investors. Incentives are a strong driver of culture and we believe we can reinforce our investment style by applying the same principles to measure and reward individual performance – process over outcome, long-term, and aligned.