How We Invest

Portfolio Management

Once we find a potential investment idea that meets all the criteria and belongs to one of the three categories above, we test its fit in the portfolio.

Our goal is to craft a relatively concentrated portfolio with less than 40 stocks, depending on their suitability to each client’s individual situation.

We aim to maintain a diversified portfolio, and we adjust position sizes over time, both while we build the position and later, as we trim it.

How do we review or investments?

As we patiently wait for our investment case to materialize, we constantly monitor our holdings in light of all new developments affecting the business, the industry, and macro environment. We also stay in touch with the management to closely evaluate progress being made toward the goals we have established for the company.

When do we sell?

If we were business owners, we would prefer to never sell. But given the markets’ tendency to swing between excessive pessimism and optimism (or fear and greed), we need to consider selling our holdings when expectations are too high, valuations are over-expanded and future returns are likely to be unsatisfactory as a result.

We like to see our opportunistic purchases turn into long-term holdings, where a skillful management continuously reinvests profits at high returns, and the stock compounds at respectable rates. But when we have to sell, we sell for three reasons:

1. We realize we were wrong, and we cut our losses – our assumptions were flawed, the business ran into deeper difficulties, or some unforeseen circumstance altered the investment case.
2. Our investment becomes substantially overvalued, and offers unsatisfactory returns going forward. The market sentiments become euphoric and the risk/reward profile is markedly changed.
3. We find a better investment idea, and we replace the existing one.

In other words, we make opportunistic purchases at good prices, and we are willing to patiently wait to see them perform, while constantly reviewing our assumptions and investment cases. We are willing to admit our mistakes, when the reality proves us wrong. At the same time we are equally committed to sticking to our convictions even if the market disagrees with us for a while, as long we have reasons to believe we are right.

As we usually accumulate new positions gradually — sometime over a couple of years — we also tend to sell gradually, letting winners realize full potential while taking some money from the table.

Risk Management

We prefer low financial leverage (debt, other obligations) — existing or potential. What matters to us is not only solvability but also liquidity: the presumed ability to borrow is not the same as cash. This can make the biggest difference during times of distress and/or economic downturn, when the strength of the business may be tested.

We are aware of the technological risk, where disruptive competition can lead to a permanent destruction of value. If we see signs of a secular decline and quickly changing competitive environment, we tend to stay away.

We avoid managements that seem to change their objectives frequently, and follow self-serving accounting practices. Both can lead to trouble, and permanent losses.

Waiting list

We will keep a list of potential names that would be attractive at a better price, and may initiate them gradually.