We are value investors. We take both of those terms seriously: we value businesses, and not just stocks, and we invest in them for the long term. Our portfolios often don’t look like the market and may not behave like it, as we believe that differentiated performance requires differentiation from the benchmark. Systematic outperformance requires variant perception: one must believe something different from what the market believes, and one must be right. This usually involves weighting publicly available information differently from the market, either as to its magnitude or its duration. More simply, the market is either wrong about how important something is, or wrong about when that something occurs, or both.
Our investment approach revolves around five main principles:
We value businesses by looking at a combination of fundamentals, strategy, peers, management and capital allocation to determine what a business is worth. We then compare our assessment of intrinsic value to the current price and invest when we believe the intrinsic value is significantly higher than the current price. We also translate observable market prices into embedded expectations for specific fundamentals and determine whether those expectations are reasonable.
We believe that investors are increasingly taking a short-term view and trading stocks from quarter to quarter. We focus on factors that we believe are central to long-term performance throughout our process. Investing with a longer time horizon plays a significant role in what we view as our competitive edge.
We look for investment opportunities during periods of uncertainty, typically investing in businesses, industries and sectors that are out of favor with current market sentiment. We think there are three sources of edge in markets — informational, analytical and behavioral. The most enduring of these three is behavioral, as humans tend to react emotionally, especially during abnormal and volatile times. As a result, we tend to see the greatest investment opportunities when markets are in a state of panic.
Intellectual curiosity, adaptive thinking and creativity are important parts of our investment process. Our team stays current with numerous nontraditional resources, such as academic and literary journals in the sciences. We have also been involved in the Santa Fe Institute for more than 20 years and recently became involved with the London Mathematical Laboratory. Incorporating nontraditional inputs into our research and process allows us to view businesses and situations from perspectives that others may not.
Constraints almost always, by definition, impede solutions to optimization problems. Our two strategies are characterized by their unconstrained formats, and each attempts to maximize the long-term risk-adjusted returns for our investors through a primary objective — one through capital appreciation and one through income.
In order to earn an excess return, one has to assess that information differently from the way it is embedded in market pricing. Whether making an investment or an investment recommendation, unless it is predicated on the difference between what you expect and what the market expects, the outcome will just be noise. Bill Miller, CFA January 2003