“You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map”
– Warren Buffett
My investment philosophy is opportunistic. I’m willing to invest in any industry, region or part of the capital structure, as long as I can understand the risks I’m underwriting, the economics of the business or security and the incentives of the people involved. This creates a large opportunity set and allows me to be extremely picky in the pitches I swing at.
I only have two firm rules:
- Only invest with a large margin of safety
- Only invest when incentives are aligned
“The one who follows the crowd will usually get no further than the crowd. The one who walks alone, is likely to find himself in places no one has ever been.”
– Albert Einstein
A core concept that drives my philosophy is to “fish where the fish are.” Therefore, I focus my time analysing areas of the market that have attributes that cause a structural inefficiency:
- Orphan stocks: companies not followed by the mainstream investment community, low/no analyst coverage, limited institutional ownership, low trading liquidity, non-reporting (dark) companies
- Forced selling: Spin-offs, bankruptcy, delistings, index removals
- Emotional selling: broken IPO/M&A, fallen angels, industry downturns
- Change: new management teams, turnarounds, restructuring, asset sales, divestment, hidden value, activism
In each of these categories, there are structural reasons that create a sustainable pool of potentially mispriced securities. Small, illiquid, uncovered companies are of no interest to large, smart investors because the return on their time invested (through the profit on an investment) is too small to justify. Forced selling is as it sounds, non-fundamental and due to institutional constraints – the perfect seller to buy from. Emotional selling is a less populated bucket and more difficult to decipher value from trap. And change is by definition, difficult to handicap.
“The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple”
– Charlie Munger
Finally, I manage my portfolio in a highly concentrated manner, typically holding 6 core positions + a range of special situations. This reduces my need to swing, allowing me to keep a high hurdle for new investments, and spend the majority of my time turning over stones.