Investors often ask us what sort of risk are we willing to take. Our philosophy of investing in companies with a strong financial position, the ability to grow and a significant discount to our price target allows us to risk time versus capital.
Many popular investing strategies see time as a risk, or as a mechanism that erodes value. Numerous quantitative and hedge fund strategies are constructed to trade short term events, such as earnings results or economic data announcements. With these approaches time is an adversary, because once the event occurs, the capital needs to be redeployed regardless of the outcome or value. Similarly, time erodes value with strategies that trade futures and options, since every day that passes towards a contract expiration is mathematically a loss of opportunity. Some investment firms have even invested in an arms race to build their own fiber optic trading networks to shave milliseconds off trade executions. In all of these approaches, the passage of time is seen as a cost to investors.
In stark contrast, we see the passage of time a positive and an ally. We believe the passage of time helps us to control risk and invest opportunistically by increasing or trimming stock positions that have extreme moves over the short term, as long as our investment thesis for the company remains strong.
As the first pillar of our investment philosophy, we insist on a strong financial position so that a company can withstand unexpected short-term bumps, either in its business or in the macro environment, without compromising its business strategy. We believe that a management team that must scramble to find financial resources will be distracted from effectively executing on a long-term value creation strategy.
The second pillar of our philosophy, which is the ability to grow, defines our view of time as source of value creation instead of risk. As long as a company can produce returns on its capital that are significantly over its cost of capital, the passage of time should allow for compounded value growth and thus be an ally for our investment strategy.