We construct all of our portfolios around two simple objectives: to protect and grow our clients’ capital. We believe the management of risk, not the management of returns, is the best way to meet our clients’ long-term investment objectives.
Our philosophy is born from Benjamin Graham’s famous quote “investing is most intelligent when it is most business like.” Warren Buffett said these are the most important words ever written about investing, and we agree. We believe that investors should act like owners of a business and this principle guides all our investing activities. We embrace an “ownership” mentality rather than the commonly held view that stocks should only be “rented” for the short term.
At Ravenstone Capital Management we invest in high quality businesses, and we expect the return on our investment to be driven predominantly by:
We seek to own businesses that will compound in value over the years. Accordingly, we are very careful about the securities we select. We focus on leading companies in attractive industries with strong and sustainable competitive positions, high returns on capital, strong free cash flows and management teams that think and behave like owners.
The ratio of price to intrinsic value is at the core of our valuation methodology and risk management.
When considering an investment, we view value in absolute terms, not merely on a relative basis. Our discipline is to buy high quality growth businesses at prices below our estimate of their intrinsic value. We do not buy securities simply because they are down; we invest in businesses because their stocks are mispriced.
Managing risk is critically important to delivering attractive long-term investment returns. As a result, we begin our evaluation of each investment with a healthy dose of skepticism. Before considering the return we might earn on a new investment, we always consider how much capital could be lost. Most academics and speculators define risk as volatility, or the degree of changes in the price of a security, whether up or down. At Ravenstone Capital, we define risk as the permanent loss of capital. With this definition in mind, the most appropriate way to control risk is to know exactly what you own and what it is worth. Therefore, we base all investments on a deep, fundamental, bottom-up research process that results in a concentrated portfolio. This methodology leads us to focus on our highest conviction ideas and allows them to have a material impact on the portfolio’s performance. The better we understand the merits of a particular business, the lower the overall risk of making a poor investment decision.
We are patient, long-term investors. We seek to take advantage of temporary dislocations in the capital markets, by focusing on the long-term intrinsic value of a business and its underlying assets. We believe our ability to be patient and focus on the long-term gives us a competitive advantage. There can be periods where fundamentals and prices disconnect, but ultimately fundamentals are what matter.
Identification of high quality businesses that are mispriced typically comes from extensive reading, investigative travel, unconventional thinking and capitalizing on our experience and expertise. Our approach does not restrict where we will invest or the size of the company we will invest in; it only limits the quality of the businesses we own and the price we pay to own a share of that business. Once a potential investment opportunity has been identified, we begin our due diligence process.
Opportunities worthy of further study are put through the rigorous analysis necessary to attain the level of comfort inherent in a prudent investment. Our extensive research includes evaluation of company reports, industry journals, sell-side research as well as speaking with and visiting management teams. Qualifying companies must have a sustainable competitive advantage, have a history of growing revenue, margins and cash flows, must be capable of generating strong returns on capital, possess a strong or improving balance sheet and must be run by management teams that think and act like owners.
We adhere to a cash flow focused valuation discipline. Through prudent analysis, we assess the value of a business under various scenarios, both optimistic and pessimistic, to understand its upside and downside potential.
We invest in our highest conviction ideas only when we are convinced that the shares can be purchased at a discount to our estimate of intrinsic value. If such a margin-of-safety does not exist, we remain patient and monitor the shares of that company until such a time arises.
Buying quality, undervalued companies only gets you half way to a successful investment outcome. While our ultimate goal is to hold businesses for long periods of time if not forever knowing when to sell them is of equal importance.
Portfolio positions are reduced or eliminated for one of four reasons: