Our attitude to our fellow owners is not as clients but as partners. We view our fund as a conduit for our fellow owners to own quality investments. We hope that you do not think of the fund as a squiggly line that moves around from month to month and year to year. Certainly, there will be times when news headlines make you nervous and you feel like selling out of everything. Other times when you feel the need to increase your stake in the fund when there is ample good news. Both temptations are likely to limit your own performance relative to how our underlying investments perform. Instead, you should visualize yourself as a part owner with fellow members of your extended family in a bunch of extraordinary businesses.
2) Commitment to eat our own cooking
Like other owner-operator businesses, we commit to having a major part of our net worth, and indeed our families’ liquid net worth in the fund. We are comfortable having this concentration because of the high hurdle we put in place for the stocks the fund owns and also in the wide range of diversification we have across these businesses.
3) Focus on long-term compounding
Our goal is to maximize the average annual return above stock market return. There will be times where we underperform. We do not ascribe much significance to short term underperformance. We are certain that the net worth of our partners and ourselves will outperform the market over the medium to long term.
4) Preference for cash generating businesses with above- average returns on capital
Many of the greatest companies were bootstrapped. Indeed, other modern-day companies also do not require outside capital such as enterprise software. It’s thus our preference to continue focusing on companies with such outstanding businesses that they consistently throw off cash. We maybe lucky, from time to time, to purchase these at what the market deems a fair price. At other times, it’s possible that we may have to purchase above that the market deems fair. We prefer to purchase a small slice of the business at a valuation that we deem as significantly below its intrinsic value. The stock market tends to discount only the immediate 1 to 2 years of earnings in a quality businesses earnings stream, whereas, great businesses tend to keep chugging along for 10 to 20 years on. We will focus our energies on these.
5) Finally, all good intentions must be tested periodically with their results.
If we have selected our businesses wisely, then their stock prices must reflect the underlying operating earnings over a 3 to 5-year period. We will not hide behind excuses that a particular flavor of investing has fallen out of favor or that our fellow partners must be willing to ride through a significant period of poor performance. Rather, when the circumstances change, our opinions must change, and we must be willing to change our minds about our investment approach.