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1. To be conservative in our investments by trying to avoiding fads, companies with ridiculously high multiples, or over leveraged companies. All managers want to beat a certain index they benchmark to. By avoiding losses and compounding consistently, the end result over many years will better than erratic highs and lows. But if you lose 50% in one year, it will take 100% the next year to catch up.
2. Margin of Safety does not mean buying a cheap thing just because it is cheap. It means buying into a durable oligopoly or a durable competitive advantage which brings certain barriers to entry to ensure the free cash flow a company generates is enduring and stable. If you buy it at a good price, you just have to wait.
3. To avoid permanent loss of capital with a relatively concentrated portfolio. With a concentrated portfolio, you have to know each company you own inside out. If we manage to generate adequate returns above a certain index, the magic of compounding will help us generate good long term results.
4. To be fair and transparent with like-minded long term partners. It's all about fair and aligned incentives. No management fees. We believe in not taking a profit unless we meet a hurdle. This means setting standards and rejecting clients/partners who don't share the same long term views. This means clear and simple writing and not promising one thing while doing another. It also means not changing the benchmark used for annual results.
5. To treat stocks as businesses and invest in surer enterprises which I can understand. It is better to have modest gains than placing wild bets with low probability. To quote Thomas Carlyle, "Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand." Avoidance of pharmaceuticals and certain speculative industries is necessary- as we cannot predict everything and we don't need to know every single industry.
6. To pick each investment in terms of risk and opportunity cost. Risk does not mean volatility. There could be catastrophic risk in an older industry such as retail due to it being disrupted by technology companies. We also don't have a macro-view and won't always give an opinion on politics or macro-economics. Slow and steady wins the race, which is why we don't short businesses or use leverage. We care about the individual businesses we have invested in, its competitors, products, and management.
7. All client's and partner's information is kept confidential. We hope that partners will reciprocate by not publishing online any of the annual letters. We strive to be as low key and discrete as possible.
Please direct all inquiries to jeff@allcvr.com.
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