How do we select the companies whose stocks we want to own? For us to invest, we need to believe we have established some reliable truths about the opportunity through our research, analytical work, and valuation estimate.
We insist our companies meet the four following quality selection criteria, which we call the "F.A.C.T." of the investment case.
In looking for suitable opportunities, our approach is akin to an R&D process. We need to come up with highly differentiated fundamental ideas, and quickly identify those than can become actual investments. This funnel-like process relies on a few key steps and inputs.
Necessary conditions: We eschew businesses that do not lend themselves to appraisal. We also limit ourselves to countries with established rules of law and political systems that allow for transparent and unbiased enforcement of those laws.
Proprietary research: In analyzing companies, we take a bottom-up, research-driven approach. We dedicate a lot of time traveling to visit companies and meet with management teams. We interview competitors, suppliers, customers, and other relevant third parties. We study how industries can evolve over time and how adept management is at responding to change.
Filings and publications: We also study a long history of annual reports, investor presentations, conference call transcripts, third party research and other relevant publicly available materials.
Financial Analysis: Through this process, we seek to gain an understanding of the fundamentals of the business. We use our research findings to assess a company’s normal economics, and to estimate the present value of its future cash flows. We also study its financial position and how its balance sheet would hold up in challenging conditions.
