I have always been of the belief that the financial markets are efficient in the long run but, in the short run they are prone to bouts of inefficiencies.
“In the short-run, the market is a voting machine, in the long-run a weighing machine.”, Ben Graham,
It is inevitable that a variety of short term factors causes the marginal buyer or seller to react in a way that provides an opportunistic entry point for a long-term buyer seeking a high return on investment in a great business. We have built a disciplined process to systematically identify these potential opportunities whereby we can apply the concept of “margin of safety” to both the business that we are buying as well as the price that we are willing to pay.
“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.”, Charlie Munger
This process includes a combination of both top down and quantitative tools to identify a sample set of potential investment opportunities that just may be selling below their intrinsic value. These particular businesses are inexpensive relative to where these businesses typically trade relative to the market. There are other broad categories which tend to lead us to great businesses that are undervalued relative to their intrinsic value. Because these great businesses tend not to go on sale often as caused by market factors, we spend a great deal of our time analyzing spin-offs, distressed debt, bankruptcies, asset plays, and complicated restructurings as a way to buy a great business at a discounted price. This combination of looking for a margin of safety in the business that we are buying as well as a margin of safety in the price that we pay has enabled us to compound wealth on a consistent basis over the years throughout the many different market cycles.
Over the past twenty-five years or so navigating many different cyclical and secular market cycles and shifts in investor sentiment, we have consistently applied this approach throughout the research process. We are looking for great businesses with compelling long-term attributes that are temporarily being discounted due to short-term issues. We are not just looking for cheap assets. We are trying to identify the great asset that also happens to be cheap. This concept permeates the entire research process as we build our models and valuation targets using conservative assumptions, choosing to be surprised by the upside. This approach carries over to our balance sheet analysis and eventually to our overall valuation work and target value. As we look at our performance history, the preponderance of return has come from the great, high free cash flowing, high return businesses that are growing and reinvesting at high returns on capital. Therefore, our objective is to identify a handful of these businesses, buy at a good entry point and hold for the long term.