investment process

We look for quality business models

These are companies with a competitive moat that is sustainable or growing through time. Our analysis seeks to uncover underappreciated attributes of the business model that can lead to above average returns over time. We look for scale advantages, network effects, high switching costs, cornered resources and process power among others.

We look for strong management teams

We place a heavy emphasis on the strength of a company’s management team. We are looking for evidence of strong execution on strategy, disciplined capital allocation and long-term thinking.

idea Generation

A good idea can come from anywhere.

We conduct many meetings with company management teams over the course of a year – and over the last 10 years we have met with hundreds and hundreds of management teams – turning over many rocks to find gems.

We tap the following sources for ideas:

  • Industry network of broker and research analyst relationships

  • Industry network of investors and portfolio managers

  • Related and connected companies to portfolio companies

  • Investor groups and associations

  • Forums, blogs, newsletters

  • Financial and industry-specific media

research process

We believe that applying fundamental analysis to smaller, less followed companies provides a greater return on investment in time. We believe that there is a more sustainable investing edge to be had – from both the information that can be gathered and the processing of that information.

Smaller companies are also subject to more overreactions to news and noise as they tend to have fewer institutional investors that are looking at business fundamentals and taking a longer-term view. This can allow us to have a behavioural advantage when other market participants are acting less rational.

validation

Trust, but verify.

Business Model Analysis

We seek to fully understand all the key elements of the business model:

  • Value Proposition

  • Customer Segments

  • Distribution

  • Revenue Streams

  • Key Activities, Resources, Partnerships

  • Cost Structure

Competitive Advantages

We seek to fully understand the source, durability, and trajectory of any competitive advantages:

  • Intangible Assets

  • Cost Advantages

  • Switching Costs

  • Network Effects

  • Efficient Scale

testing and analysis

We seek to test our thinking around the strength of a company’s business model and competitive advantage.

  • Go on-site and see firsthand any of the advantages a business may have. See the business model in operation.

  • Refer to industry experts to gain insight into their view on the company’s strengths and weaknesses.

  • Review industry competitors to better understand the competitive dynamic.

  • Stress test the assumptions underlying expectations to understand how resilient or sensitive the business is to shocks and changes.

The security selection process includes:

  • Determining a valuation range

  • Understanding the perception/valuation gap.

  • Identifying asymmetric payoff profiles.

  • Scenario analysis and probability assessments to understand the full range of outcomes.

  • We seek to understand the path to valuation, including milestones and potential catalysts.

security selection

portfolio construction

We construct portfolios to both diversify risks and to focus on the best opportunites.

  • The portfolio consists of 15-25 diversified companies that offer the most compelling risk-reward opportunity.

  • Position sizing is a function of a company’s return/risk ranking and the strength of its business model.

  • Most positions are between 3-5% weight in the portfolio.

Stock volatility is often used as a shorthand measure to evaluate risk. We seek to understand volatility to determine if it is a signal of fundamental weakness – but it is often not fundamentally driven.

Volatility can often provide opportunities, particularly in less efficient markets. We don’t blindly equate volatility with risk. It sometimes provides us with our best opportunities.

risk management

We view risk as a permanent loss of capital – mitigating this risk is our primary focus.

Risk is managed by:

  • Fundamental analysis and downside stress testing

  • Premortem scenario analysis

  • Ensuring diversification

  • Understanding correlated positions

  • Limiting the absolute size of any one position

  • Understanding position liquidity

  • Having humility in reviewing an investment thesis