To find good businesses at attractive valuations, our investment team conducts fundamental research. As demonstrated above, this research is based on a well-defined and repeatable process, and is guided by our investment philosophy. We believe that this approach to investing is capable of generating consistent investment returns over the long term through the power of compounding.
We believe a margin of safety exists when we are able to mitigate both business risk (our business, financial and management criteria have been met; sustainable competitive advantage exist) and price risk (when we believe there is a significant discount to intrinsic value at the time of purchase – we aim to purchase at 75% of our estimate to intrinsic value or less).
Financial markets can be volatile, and short-term market sentiment often causes economically strong companies to trade below what we think they’re worth. Over time, however, business fundamentals win out, and eventually value of companies are driven by how well their businesses perform. We stick to our fundamental research process to identify companies that are trading below their intrinsic value, and think independently of the market’s prevailing sentiments.
We will sell out of a position entirely if we think a company’s products or services will be less relevant in the future than they are now, or if there is significant deterioration in the company’s sustainable competitive advantage, industry dynamics or quality of management/governance. The investment team constantly monitors our investments to ensure that we have just as much discipline when we sell as when we buy.
A focus on credit quality helps us assess the relative value of potential investments, while seeking to add excess returns through security selection and sector rotation. We rely on the strength of our research team to identify quality securities through this rigorous, detailed analysis.
The two main macro-economic indicators that we pay attention to are interest rates and inflation, or to be more precise, expected levels of interest rates and inflation. Based on our assessment of the future direction of each, we position the average duration of our holdings to benefit the most from the expected changes in interest rates.
The chart below illustrates how the various fixed income instruments perform depending on interest rate and inflation outcomes.