On Investing:


Q:  You have articulated your investment philosophy but can you talk a little about process?


A:  I do have a 100 point scoring scheme that all prospective investments are run through. It is made up of both objective and subjective criteria and requires significant time, research, and consideration to be completed. I am acutely aware that the investment decision making process cannot be reduced to a numerical scoring system. Having said that, I am an advocate of checklists, be they in cockpits or operating rooms, as they are time proven in reducing unforced errors. My checklist forces me to look through the prism from many different angles.


Q:  Having done that initial work what becomes your primary focus?


A:  I am typically focusing on free cash flow businesses, companies that consistently generate cash flow in excess of their expenses and capital requirements. So I am focusing on that free cash flow and trying to determine:


a)      What the free cash flow truly is.

b)      Is it growing, stable, or in decline.

c)       How resilient it is to past and future change.

d)      Management’s ability to allocate free cash flow in the interests of a long term owner.


Q:  How do you forecast growth?


A:  Differently than when I was younger. Then I would have been guilty of aspiring to misplaced precision, ascribing 8% growth for some and 12% for others. Now I limit my growth tree deliberations to three branches; growth, flat line, or decline. Long term it is the direction, rather than the degree, that really matters.  I find myself able to focus on a much more cogent thesis thinking along these lines.


Q:  How do you evaluate management?


A:  I do directly talk to management with our small and mid-cap companies though less so with the large multinationals. It is a tough question as some executives are good at talking about their business while others are good at running their business. You have to be careful about what impresses you.

With that limitation I ascribe considerable weight to their ability to allocate the company’s free cash flow over the last ten years. It is a challenge to allocate this capital well and financial statements capture this ten year record accurately, sometimes painfully so.

We are also attracted to plain-spoken management teams with material share holdings of their company stock.


Q:  What is the biggest thing you have learned in your investment career?


A:  Focus on strong resilient businesses. Investors are constantly weighing the balance of quality and price as they make their decisions. Initially, many value investors have a magnetic intellectual pull towards inexpensive, less known securities. Time is a friend to a strong business, sometimes less so to the statistically cheap. I remain resolute in waiting for a bargain price but the quality of the business weighs more and more on the pool of prospective investments I consider.