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
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.
- but try not to bother the managers unduly, and resist claims of XXX visits per year.
- not helped by the ballooning page count imposed by current accounting standards
and micro-managing regulators.
- although many of our shares remain quite illiquid. We do however try
to sell whenever we lose confidence, rather than seeking new assets to dilute
the problem holdings.
- Deleted from past versions: "in Asia one can often find stocks with
outstanding long-term growth prospects and cash-generating ability at bargain
valuations. Usually, there are stocks as cheap as Ben Graham’s famously
rewarding buys during the Great Depression; some of them meet our quality
criteria, and would please a Buffett or a Fisher. The stocks in our portfolio,
overall, have growth prospects at least matching market leaders, at a
fraction of the price." We were happy with this statement in 1999-2003,
but would not make it now. A smaller percentage of companies meets
our quality criteria - not necessarily due to declining corporate standards,
but also to increasingly difficult global conditions - and valuations
for the solid businesses have risen. Also, our fund size has increased -
mostly organically - and although it is still small by industry standards,
this rules out most microcaps. We still consider our portfolio more
attractive than an index, but now look less for bargain valuations and growth,
more for reasonable valuations and resilience.