- We value businesses as would a long-term private buyer, and generally ignore the short term views and price influence of other market participants, except in so far as these create opportunities. In Benjamin Graham's classic analogy, the investor is in business with a manic depressive partner, Mr Market, who obligingly sets a two-way price every day. Most of the time, the investor will listen to Mr Market, politely decline to take action, and get on with real life. Sometimes however, Mr Market's price is wildly in excess of any intrinsic value, and the investor may take these opportunities to sell, perhaps even to retire. At other times Mr Market's price is ludicrously low; we have at times in the past been able to buy good businesses with honest management for less than their net cash balances. At such times, the sober investor will buy, without worrying unduly about whether Mr Market's price may be even lower tomorrow.
- We like value – buying a dollar of assets for 50 cents, for example – but never at the expense of quality. In developed markets, legal protection may (perhaps) be good enough to base decisions on numbers alone. In Asia, management integrity is paramount. We also prefer "operating assets", which generate cash or will do so in future, rather than "dead assets" reliant on the price someone else may pay.
- We like growth as much as value - but "growth at a reasonable price". One of the easiest mistakes is to overpay for a good company, or a good story.
- Given the impossibility of infinite growth on a finite planet, and a suspicion that growth may in future be harder to find, "sustainable income at a reasonable price" is attractive too.
- Sustainability is never absolute. We value resilience.
- We seek good businesses: internal returns are important. Deep value buys may rise from very cheap to somewhat cheap and remain illiquid. The managers of our holdings do most of the work for us when they continue to generate good returns internally, and this reduces reinvestment risk.
- Free cashflow is good; sensible capital allocation is key.
- We like dividends - especially in those parts of Asia where there are no tax disadvantages, but anyway it is generally a good idea that excess cash be returned to the shareholders. (If companies with a good value-adding record want cash for expansion, investors can be relied upon to stump up enthusiastically for a rights issue.) We dislike buyback-and-issuance schemes designed to enrich insiders, but buybacks shrinking the capital base at discounts to intrinsic value are sometimes constructive.
- We try to know our companies inside out¹. We visit the companies, try to read their annual reports and announcements from cover to cover², talk to their competitors, and so on. The longer we've known them, the better.
- We don't worry about missed opportunities. Most companies are too complicated: we look for businesses we like and think we can understand, and focus on relatively few.
- We buy securities on a 3-5 year time horizon. (Maybe even more - ideally we would like to buy good companies at good prices and hold for ever, but in an ever more volatile world, 3-5 years may be as far ahead as one can realistically hope to see, and certainly we need to keep reassessing.) However, if a security appreciates rapidly to the point where it no longer represents reasonable value in absolute terms or relative to prospective purchases, or if new information comes to light which causes us to reevaluate, we may sell with alacrity. Restraining fund size helps us to maintain selling discipline³.
- The emphasis has changed slightly over the years, due to changing market conditions and sometimes-painful experience. Our style will, we hope, continue to evolve: in a changing world, we see no point in narrowing options unnecessarily.
Claire Barnes
January 2014
January 2014
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