Less style, more intelligence

19 December 2018

By Lorenzo Dicorrado, fund manager


The term “value” is perhaps one of the most misused and misunderstood terms in our profession. When the style is in fashion, the term appears on countless marketing presentations. When it is not, it is magically substituted by the term quality. Even among genuine value investors, there can be countless applications of the philosophy. So how do we define our approach?

We see ourselves as classic value investors, looking for securities where the price is substantially below what a conservative estimate of intrinsic value shows it to be worth. This is what all intelligent investing should be, whatever “style” is used to define it.

Like all investors we love fast growing businesses but do find that the confidence we have in our intrinsic value calculations decreases as the assumed growth rate rises. Accurately forecasting growth is empirically a random exercise at best so our preferred method is to look for securities that do not discount aggressive growth expectations, whose prospects we can estimate fairly accurately, in industries that we can understand.

We typically look for businesses with high ROICs, high cash generation and good growth prospects, but prefer to buy when these factors are temporarily hidden from view. Taking advantage of other people’s discomfort and behavioural biases should reward us with higher returns and a margin of safety.

Our preferred hunting ground is among those parts of the market that are overlooked, misunderstood or potentially undervalued for idiosyncratic reasons. We like companies that are temporarily disregarded due to, perhaps, an unwillingness to do fundamental research or an excessively short time horizon.

We do not explicitly think in terms of opportunity sets but find that these companies typically fall within four broad buckets:

  • Strong compounders: Good, healthy businesses that are growing strongly but momentarily unfashionable

  • Fallen angels: A great company is dealt a large but non-fatal blow

  • Strong cyclicals: Industry leaders that are unduly punished by the market in a cyclical downturn

  • Special situations: Spin-offs, restructurings, post-bankruptcies, recapitalisations.

Buying unloved companies with a large margin of safety sounds simple but is far from easy. Adhering to the principles of our philosophy and escaping those same behavioural biases we want to exploit is the most difficult aspect of our job.

We therefore operate a disciplined investment process with a highly structured note format, deep fundamental research, forward looking and/or reverse engineered DCF, and multiple feedback loops in the form of team discussions and recorded decisions.

If this description of who we are makes sense to you, we invite you to join us in thinking about investment philosophies, not in terms of styles, but in terms of intelligence.

Next
20 December 2018
Spreading the love
Previous
14 December 2018
Family fortunes
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