Our Process

OUR PROCESS STARTS with identifying business models.

We do this by using both quantitative screens and qualitative searching. Price changes, news catalysts, special events, industry analysis and importantly getting out globally and walking-and-talking alerts us to business models and their potential mis-pricings.

We use discounted future free cashflows models to highlight and test assumptions about both business and share price drivers.

We are fully aware of the investor scepticism that long-term discounted cashflow models receive and the perception of being too intricate and uncertain.

We acknowledge these difficulties, however our use of the approach does not rely on the need to produce pin-point forecasts. In fact we are strongly of the view that any investment process which places such a forecast as its heart will inevitably fail. The fundamental law of investing is the uncertainty of the future and it is a human condition to be particularly poor at forecasting it.

Leverage, debt structures, accounting treatment and other business and financial ratios can impact the key driver ratios of a firm’s valuation and trigger variances in the market’s expectations embedded in the constantly changing share prices.

Through our focus on understanding the key drivers of a company’s value, its business and financial risks, we dramatically reduce the resources required to listen to the noise created by the army of specialists and market experts who spend time on the often fruitless exercise of forecasting short term earnings.

Our investment tools and dashboard-style ratios assist us to be alert to the key business sensitivities and assumptions embedded in share prices.

We spend time focusing our research to assess the broad range of potential outcomes and understand how share prices may react to such shifts in expectations.

Our aim is not to form a single view, but rather to examine the collective expectations and compare them to our modelled scenarios.

Many investors place a high level of confidence in managements’ views, sell-side views, house-broker research, the implied certainty of future events or even the pattern of the recent past.

Our process allows us to efficiently aggregate the diverse views from the breadth of influences throughout the market within a disciplined, return on capital framework.

The core of our business is about making decisions, under uncertainty, about the future .

We do this isolated from group think (short-term) pressures, free from index-relative-constrained thinking, and with a single focus on absolute total dollars of capital created and the ‘units’ of invested capital put at risk.

Our process does not rely on a information edge in a world where information is disseminated rapidly (24/7) and to all those who choose to take it.

We have a systematic, evaluating process based on fundamental free cashflow and behavioural analysis which guides our reasoned judgements about companies, the markets’ expectations and future implications for share prices and company value.

Our investment process focus is always about understanding what is an acceptable entry price for ownership of a business model so as to meet our asymmetric investment criteria; wealth creation whilst minimising permanent capital destruction over medium to long term horizons.

Our assessment of research and investment opportunities are based on both their attribution and circumstances. Each piece of information is understood individually but also collectively and always balanced against the framing of its presentation and the investing landscape.

Our research focus is on falsifying rather than verifying our views.

We subscribe to the belief that an entry price should provide a ‘safety of margin’ for a portfolio exposure.

That is, at what price (and over time at what exposure weighting level) can we gain exposure(s) which allows for some errors in our judgements and calculations about the future and still most likely not result in a material and permanent loss of capital to a portfolio.

We never confuse price volatility for risk. Volatility can be a great condition allowing us to buy or sell.

Share prices rise and fall with great volatility relative to the cashflows of a business.

We overlay security active risk management with portfolio risk management by accepting some higher risk opportunities but at lower exposure ‘units’ of dollars at risk and or managed with transparent, derivative protection/hedging tools.

Share price volatility creates skewed distributions of the markets’ expectations either favouring our upside or downside modelled scenarios. Patience, discipline, (including the non-institutional, strong discipline required to hold cash) and the ability to not confuse portfolio activity with results, positions us to take full advantage of market volatility and the changes to expectations about the uncertain future.

The market frequently misprices company shares due to a range of reasons.

This includes the behavioural attraction of many investors to the short term due to;

• conflicting remuneration, mandate or employment incentives;
• career risks (including index hugging);
• lack of patience (activity versus results); or
• heuristics (rules of thumbs) being blindly followed.

We also see mispricing opportunities because of the focus on noise not news due to conflicting incentives to sell ‘stories’ because of news cycles, capital raisings, sell-downs or even from management (marketing) teams themselves.

Finally, share prices and value differ because of the continuous and volatile nature of change in expectations about the future and the common human behavioural error to extrapolate most recent changes or events.