Our Investment Philosophy

What is so important about the three-legged stool?

We speak a lot about “essences,” and the essence of our investment approach is perfectly captured by the visual of a “three-legged stool.” This metaphoric three legged stool describes what we look for in an investment: (1) extraordinary business, (2) talented management and (3) great reinvestment opportunities and histories. I have an old three-legged milking stool in our conference room and it is clear by looking at it that it is sturdy and durable.  We believe our stool is just as sturdy and durable based on our many years of experience!

What was the inspiration for your investment philosophy?

It is common knowledge that the average return in the U.S. equity asset category over the last century has been in the neighborhood of 9% or 10%. It just so happens that this figure correlates with the rate of return on the owner’s capital and frequently with the growth in the book value per share of the typical U.S. company. We posited from this observation that our return on an asset would therefore approximate the return on the owner’s capital, absent any distributions, and assuming a constant valuation. And since our stated goal is to compound our clients’ (partners’ and shareholders’) capital at an above average rate while incurring a below average level of risk, we needed to identify this group of superior businesses which earn above average rates of return on their owner’s capital.

How does your investment philosophy differ from other asset managers?

There was a time when I used to answer that question by saying, “I don’t know. You tell me.” Now, however, I believe that we are very different in at least two important ways.

First, our decision to buy or sell shares in a business is based on the same fundamental criteria. We do not set sell price targets when we buy a security – we often say we are not looking for the exit on the way in – because we are not looking to simply trade securities based on their price movement. Rather we are looking to compound the capital we manage, and have identified that investing in these “extraordinary” businesses, as we define them, is the BEST way to achieve our goal. We begin sell discussions when one or more of the legs of our stool is “broken or injured”. The outcomes over our years of experience clearly reinforce this notion.

Second, Wall Street’s obsession with what we describe as the “beat by a penny, miss by a penny” syndrome frequently gives us opportunities to make investments at attractive valuations. We keep our focus squarely on growth in the underlying economic value per share – often defined as book value per share – over the course of time. Our timetable is five and ten years ahead, and quarterly “misses” often create opportunities for the capital we manage.