Understand Their Growth
Potential
“Growth” and “Value” are two factors in any
investment – there is always a growth rate and always a
valuation. We take valuation seriously because even the
best business is a sub-par investment when you pay too high a
price. However, we prefer to invest in businesses with
sustainable revenue and profitability growth potential because
of our long-term horizon. We look at both
the growth potential of today’s products and services as well
as those of future opportunities.
Valuation
In assessing valuation, we start by looking
forward at least three years to estimate business growth,
profitability and cash flow generation. Then, we use our
understanding of the company and its industry to estimate the
multiple of earnings investors will likely pay for those
earnings. An important part of this process is
identifying situations in which the fundamentals of the
company are being undervalued by today’s market. In all
of our valuation efforts, we use conservative assumptions to
help provide a margin of safety.
Sell Process:
Investments will be sold if: (1) the assumptions supporting the original investment prove to
be incorrect (i.e. we were wrong); (2) the facts supporting the original investment adversely change, or (3) a
prospective investment is compelling enough that it makes
sense for us to sell an existing position.
Portfolio Characteristics:
A typical portfolio will be more
concentrated than most other investment products, with
typically anywhere from 8-20 stocks owned at any one
time. Our reasoning behind a more concentrated approach
is that we want to be invested in our best ideas. Cash
levels will vary depending on the ability to acquire
worthwhile investment candidates at attractive prices.
Turnover will typically be lower than most other investment
products because of our longer investment horizon.
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