David Poppe and John Harris of Ruane, Cunniff & Goldfarb, which manages the Sequoia Fund.
1. It is important "to understand the culture of a company as well as its numbers".
2. "Align yourself with management teams which make good decisions" and then don't interfere. Follow the Buffett principle and ask yourself the question, "If you had to leave a million dollars with somebody for five years, would you trust this person to be a fiduciary of your investment?"
3. "As you start to weed out the bad actors, you also realise who the good actors are". This is like Howard Marks' ideology that "if you take care of the losers, the winners will take care of themselves".
4. "Is it as good as it looks? That's the hard part." Usually, John Harris says, "the closer you look, the more risks come into focus. It's very rare that the deeper you dig into a business, the better you like it". Essentially, Charlie Munger is right in saying, "Its not supposed to be easy. Anyone who finds it easy is stupid". In most cases, if it seems too simple, you have missed some risks.
5. MOATS
"All else equal," says Harris, "we would always rather own a business that doesn't have to put any money in to get money out," because this means that the 'ROCE' is probably quite high. But, Harris quickly provides the opinion that "Sometimes its good to have to spend a lot to make a lot, because that means its hard to copy", because "wide moats are preferable to narrow ones." For example, the fact that "it is hard to recreate the infrastructure that Jeff Bezos has built over the last 15 years," gives Amazon a wide moat. Asset-light businesses, such as Google, though economically superior, may not have as much of a moat, in Harris' opinion. In my view Google may not necessarily be the best example. This is because Google has a wide data moat, and also reinvests a lot of capital to fund experimental projects, despite its search engine being very asset-light.
6. UNCERTAIN FUTURE
"Most of the mistakes in our business are made when people look at numbers and naively extrapolate the past into the future." Not only is the past not always indicative of the future, but often, "the future is no longer what it used to be", or what we thought it was. Concurrently, several asset managers spend a disproportionate amount of time monitoring and reevaluating their existing portfolio. When you do this, however, you must be careful. This is because it is very easy to become unnerved by short term turbulence and lose faith in a business which still has good underlying economics. Hence, you must "adjust for the fact that its an inherently uncertain exercise".
7. EMOTION vs. INFORMATION
"Investing is more an emotional than intellectual exercise, and it becomes very hard to stay on an even keel and to make rational, unbiased judgements if you're making them base on someone else's information." Thus, you must always do your own research. They believe that it is not always possible to "have an information advantage and know more than the next guy." But, Harris says, "you are most certainly at awn informational disadvantage if you haven't made the effort to gather enough information to make an informed decision. " In order to even attempt to be rational, you must make an informed investment decision to begin with. This is because sooner or later, the business will experience a period of turmoil, and you will only be able to stick it out if you firmly believe in your 'story'. Indeed, some may say that you should make an informed decision and then leave the investment alone for a substantial period of time, in order to prevent sentiment from influencing your decisions, because "when you're lost in the fog you tend to make bad decisions because you're scared"
Oh, and don't forget to "be humble", because "the market can stay irrational longer than you can stay solvent."
8. VALUE
i. "You just have to be a bit of a cheapskate"
ii. "Buy for a discount to intrinsic value"
BUT, "focus on highest quality businesses that you can buy at a reasonable/cheap price as opposed to strictly looking for cheap stocks". Essentially, they don't believe in cigarette-butt investing. Though that can also generate a decent return, it is easier to invest in good businesses when they are available cheap, and concurrently align yourself with management teams that have set in place PROCESSES which yield good decisions.
9. INVESTING IN DISRUPTIVE TECHNOLOGY
You can't say, "I am not going to invest in technology because its too hard to look out five years and know what's going to happen," because technology and DISRUPTION have now come to every corner of the economy.
10. GARP
i. "Look for healthy businesses that are in an early stage of their lifespan and have good growth in front of them, because that's really where you can make a big return."
ii. Growth-at-a-reasonable-price investing
iii. They also believe that "for psychological reasons (uncertainty?), the market tends to underestimate the rate and duration of growth for businesses that can grow rapidly."
11. INVESTMENT MODEL
i. "Unique business model"
ii. Possibility for growth/ a bright future
iii. Good profitability/underlying economics
iv. Undervalued
1. It is important "to understand the culture of a company as well as its numbers".
2. "Align yourself with management teams which make good decisions" and then don't interfere. Follow the Buffett principle and ask yourself the question, "If you had to leave a million dollars with somebody for five years, would you trust this person to be a fiduciary of your investment?"
3. "As you start to weed out the bad actors, you also realise who the good actors are". This is like Howard Marks' ideology that "if you take care of the losers, the winners will take care of themselves".
4. "Is it as good as it looks? That's the hard part." Usually, John Harris says, "the closer you look, the more risks come into focus. It's very rare that the deeper you dig into a business, the better you like it". Essentially, Charlie Munger is right in saying, "Its not supposed to be easy. Anyone who finds it easy is stupid". In most cases, if it seems too simple, you have missed some risks.
5. MOATS
"All else equal," says Harris, "we would always rather own a business that doesn't have to put any money in to get money out," because this means that the 'ROCE' is probably quite high. But, Harris quickly provides the opinion that "Sometimes its good to have to spend a lot to make a lot, because that means its hard to copy", because "wide moats are preferable to narrow ones." For example, the fact that "it is hard to recreate the infrastructure that Jeff Bezos has built over the last 15 years," gives Amazon a wide moat. Asset-light businesses, such as Google, though economically superior, may not have as much of a moat, in Harris' opinion. In my view Google may not necessarily be the best example. This is because Google has a wide data moat, and also reinvests a lot of capital to fund experimental projects, despite its search engine being very asset-light.
6. UNCERTAIN FUTURE
"Most of the mistakes in our business are made when people look at numbers and naively extrapolate the past into the future." Not only is the past not always indicative of the future, but often, "the future is no longer what it used to be", or what we thought it was. Concurrently, several asset managers spend a disproportionate amount of time monitoring and reevaluating their existing portfolio. When you do this, however, you must be careful. This is because it is very easy to become unnerved by short term turbulence and lose faith in a business which still has good underlying economics. Hence, you must "adjust for the fact that its an inherently uncertain exercise".
7. EMOTION vs. INFORMATION
"Investing is more an emotional than intellectual exercise, and it becomes very hard to stay on an even keel and to make rational, unbiased judgements if you're making them base on someone else's information." Thus, you must always do your own research. They believe that it is not always possible to "have an information advantage and know more than the next guy." But, Harris says, "you are most certainly at awn informational disadvantage if you haven't made the effort to gather enough information to make an informed decision. " In order to even attempt to be rational, you must make an informed investment decision to begin with. This is because sooner or later, the business will experience a period of turmoil, and you will only be able to stick it out if you firmly believe in your 'story'. Indeed, some may say that you should make an informed decision and then leave the investment alone for a substantial period of time, in order to prevent sentiment from influencing your decisions, because "when you're lost in the fog you tend to make bad decisions because you're scared"
Oh, and don't forget to "be humble", because "the market can stay irrational longer than you can stay solvent."
8. VALUE
i. "You just have to be a bit of a cheapskate"
ii. "Buy for a discount to intrinsic value"
BUT, "focus on highest quality businesses that you can buy at a reasonable/cheap price as opposed to strictly looking for cheap stocks". Essentially, they don't believe in cigarette-butt investing. Though that can also generate a decent return, it is easier to invest in good businesses when they are available cheap, and concurrently align yourself with management teams that have set in place PROCESSES which yield good decisions.
9. INVESTING IN DISRUPTIVE TECHNOLOGY
You can't say, "I am not going to invest in technology because its too hard to look out five years and know what's going to happen," because technology and DISRUPTION have now come to every corner of the economy.
10. GARP
i. "Look for healthy businesses that are in an early stage of their lifespan and have good growth in front of them, because that's really where you can make a big return."
ii. Growth-at-a-reasonable-price investing
iii. They also believe that "for psychological reasons (uncertainty?), the market tends to underestimate the rate and duration of growth for businesses that can grow rapidly."
11. INVESTMENT MODEL
i. "Unique business model"
ii. Possibility for growth/ a bright future
iii. Good profitability/underlying economics
iv. Undervalued
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