- The goal is simple: Maximizing returns while ensuring no permanent loss of capital.
- The fund will be run on an absolute basis and we will not be bothered how it performs relative to the market. Needless to say, if we don’t beat the market in the long run, you would be better off putting your money in an index fund.
- In an ideal world, returns will be high and consistent but the world isn’t perfect. Given a choice between consistent, but lower, returns, and higher, but lumpier, returns, we will choose the latter.
- In every investment, we desire a margin of safety. Buying a piece of a good company is a smart thing to do; paying too much for a good company is not. By insisting on a margin of safety, we hope to reduce the odds of overpaying.
- Expect the fund to have concentrated positions. 10-25 stocks would be an approximate gauge. With such a concentrated portfolio, do assume that our volatility will be higher than normal.
- We do not measure risk in terms of volatility of our portfolio. Instead, we define risk as the likelihood of losing capital permanently. To mitigate risk, we try to understand the downside as well as the upside to every investment.
- We are long only1 and do not employ leverage.
- We seek to invest in good quality businesses trading below their intrinsic value. Businesses which generate large amounts of free cash flow, have clean balance sheets and have sustainable competitive advantages are highly desired. We particularly like businesses with “moats”.
- We will also invest in companies that are trading at substantial discounts to their intrinsic values. Companies remain cheap for a reason and in such cases; we try to look for a catalyst. We may, from time to time, also invest in special situations which include restructurings, reorganizations, mergers, recapitalizations, bankruptcies and liquidations.
- Our investment horizon is 3-5 years (maybe even longer). However, we will not hesitate to sell a stock of a good company if it trades substantially above its intrinsic value. Other reasons why we would sell a stock would be if we find better opportunities elsewhere or if we realized we’ve made a mistake in our investment thesis.
1We may (rarely) short for index hedging purposes.