Investment Philosophy

Active portfolio management and value investing is my approach. I believe a “know-something” investor who picks individual securities can perform better than a “know-nothing” investor who invests passively (e.g., via an index fund). The price of a stock will reflect the underlying value of the business over time, and we can be approximately right or wrong when valuing a business.

According to Tom Gayner, co-CEO of Markel, anyone can get rich. We only need to follow three steps:

1.   Spend less than you earn

2.   Invest the excess savings reasonably well

3.   Live a long time

This is compounding expressed practically.

Ultimately, my goal is to allocate capital rationally, based on probabilistic thinking and measuring the relative attractiveness of our options. Investing is both an intellectual and a psychological competition – the greater our objectivity and the lower other investors’ objectivity, the greater our advantage.

My goal is to grow your wealth by making a few well-chosen investment decisions. I believe owning a few excellent businesses run by excellent managers bought at fair to great prices will provide the best chance to achieve long-term wealth creation. “Buy right and hold on” is my motto.

Buying right means finding those businesses with the prospect of good to great growth in durable earnings and buying such businesses at fair to great prices. The relationship between price and intrinsic value determines whether something is cheap, fairly priced, or expensive. Intrinsic value is all the future cash flows of the business from now until eternity discounted to the present - discounted due to the time value of money. Money is worth more today than tomorrow due to opportunity cost (money that you could have made).

Intrinsic value is central to value investing. If we have a sense of the value of something, then we’re investing. If we don’t, then we’re speculating. The more we focus on the business and its intrinsic value, the better. “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.” (Warren Buffett)

This investing style results in a concentrated portfolio of common stocks with relatively little diversification. Conventional investing generally considers diversification to reduce risk by limiting volatility in the portfolio. What goes unnoticed is diversification reduces volatility both on the downside and on the upside. Also, volatility is not risk. “Risk comes from not knowing what you're doing.” (Warren Buffett) True risk is present when we incorrectly value a business and pay too much for it (error of commission) or when we correctly value a business and fail to buy it at fair to great prices (error of omission). The conventional wisdom is “don’t put all your eggs in one basket”. My motto is "Put all your eggs in one basket, and watch that basket!"

Such a concentrated portfolio is categorized as “aggressive” or “very aggressive” and will likely exhibit greater volatility than the general market. The key question to ask yourself is: how will I emotionally respond to volatility greater than that of a large cap equity index fund (e.g., an S&P 500 index fund)? If you think you will lose sleep over this, then we will not be a good fit. I will not have confidence to outperform such an index over time while maintaining the same or less volatility than the index. Volatility is the price for performance. And if I cannot, then charging a fee to manage assets cannot be justified - an individual can invest for themselves in an index fund for a nominal fee (e.g., 0.05% or less).

I intend to invest in, by and large, the same businesses (stocks) as in my own portfolio and in my family’s portfolio. This results in an alignment of incentives since I will be personally invested in a significant and meaningful way in the same businesses as you. If the businesses we invest in perform poorly, I will perform poorly. If the businesses we invest in perform well, I will perform well.

If our positions were reversed, these are the qualities I would look for in an investment advisor:

1. Track record: how has the investment manager performed in the past relative to the market (after-fee compound annual growth rate compared to a large cap index fund such as an S&P 500 index fund). The longer the track record, the better.

2. Is the manager personally relatively well off? If the manager knows how to compound money, they should have done well for themselves in their own portfolio.

3. Rationality: is the manager level-headed and aware of psychological biases, both in themselves and in others? Do they focus on the underlying business and its performance, not on the stock price or price history?

4. Compound learning: does the manager have the habit of continuous learning?

5. Interest in business

6. Long-term thinking/patience

7. Integrity

What to expect:

·      active portfolio management

·      focused/concentrated portfolio of primarily common stocks

·      relatively high volatility

·      investing, not speculation (i.e., focus on the underlying business, not the price)

·      regular communication regarding the businesses you own (annual updates at a minimum). Communication primarily by email and text.

·      alignment of interest by owning the same businesses in a meaningful way

·      transparent pricing: AUM (assets under management) fee

·      simple explanation for investment thesis

·      will take tax considerations into account (the goal, however, is not to minimize taxes, but to maximize after-tax return)

·      keeping abreast of businesses owned (annual shareholder meetings, quarterly earnings calls, annual reports, and any special presentations)

·      cost averaging down (gradually buying) when a great business is on sale (i.e., the stock price goes down)

·      encouragement to invest more when prices go down (as long as the underlying business prospects are still good)

What NOT to expect:

·      passive portfolio management (e.g., index funds)

·      fixed income investing (i.e., bonds)

·      use of margin/leverage (this increases fragility)

·      options trading (this is speculative)

·      financial planning

·      price predictions

·      guarantee of future performance

·      technical analysis (price history tells us nothing)

·      macro analysis (the micro/individual business performance matters more)

·      portfolio rebalancing

·      trying to time the market (there is more to lose than gain in the long run by trying to time the market for a great business)

·      following analyst ratings and macro-related financial news

·      allowing political views to affect investment decisions

·      looking to invest more when prices go up (unless the value has increased even more)

·      researching companies or technologies you’re interested in

·      long phone calls

·      to check with you prior to making investment decisions

What I expect from you:  

    1. Ability to handle volatility

    2. Long-term view (at least 5 years)

    3. Ability to delegate (be hands off)