“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, and stands on four key pillars:
- Demand a large margin of safety
- Fish where the fish are
- Turn over lots of rocks
- Incentives skew outcomes
“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
I focus on opportunities where the risk of permanently losing money is extremely low, but the potential return is highly uncertain. Mohnish Pabrai describes this type of situation as “heads I win, tails I don’t lose much.” I believe there are structural and emotional biases that create consistent mispricing’s in this type of bet.
I embrace uncertainty in two ways. Firstly, by focusing on bets where the potential upside is uncertain. Institutional investors cannot make this type of bet as they would be unable to justify it to their peers, clients or compliance department. As long as the downside is virtually nil, and the upside is potentially enough to meaningfully clear my hurdle rate, this type of situation is a no brainer.
The second way I embrace uncertainty is through duration. By looking for bets with knowable outcomes, but unknowable timeframes, we take advantage of the institutional investors need to provide steady, short term gains.
“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
Where are the fish?
- Out of favour industries, sectors & markets
- Under-managed companies
- Sub-optimal capital allocation policies
- Forced selling (spin offs, broken deals, post-bankruptcy, de-listings, index removals)
- Special situations (merger arbitrage, rights issues, tender offers, SOTP discounts)
- Good businesses with bad balance sheets
- Companies facing an idiosyncratic event
- Companies suffering short term pain, for long term gains