“All intelligent investing is value investing – acquiring more than you are paying for.” –Charlie Munger
Our goal is to produce above-average returns at below-average levels of risk for ourselves and our clients. We strive to accomplish this goal with our unique approach to investing.
We focus first on risk reduction
We define risk as the likelihood of a permanent loss of capital over a long time horizon. From start to finish of the investment process, our investment philosophy revolves around reducing risk. In the research stages prior to purchasing a company, instead of thinking about the potential returns, we focus first on all the potential risks and pitfalls. If we can think of a way to “kill” an investment, we will just move on to the next idea.
We insist on a Margin of Safety
Assuming we can’t kill a good investment idea, we then must be able to purchase the company at a large discount to its fair value. By purchasing at a discount, we accomplish two things: (1) we increase the likelihood of a high return and (2) we minimize the effect of a mistake in our estimates and analysis.
We also increase our margin of safety by primarily looking for good businesses managed by good people. A good business is one that can earn high returns on capital and where reinvestment opportunities exist. Good managers are ones who operate in the best interests of all shareholders and who have histories of value creation.
We concentrate in our best ideas
When constructing a portfolio, we typically invest in around 15 individual companies (our top 8 holdings usually make up about 50% of total assets). In terms of risk reduction, we think it makes a lot of sense to know a lot about fewer companies than to know very little about a lot of companies. This increased knowledge allows us to better take advantage of temporary price swings and allows us to react more quickly and confidently to important, company-specific events.
Furthermore, why would anyone want to invest more money in their thirtieth-best idea as opposed to their first- or second-best idea?
We invest for the long-term
Our holding period for equity investments are typically three to five years, but we would love to find investments we can hold for decades so our money can compound and delay the effect of taxes. Our ability to consider how a company will look years into the future gives us a big advantage over the Wall Street players that are obsessed with short-term results.
Our small size is a large advantage
Our small size offers two advantages over larger investment firms or institutions. First, we are unconstrained and unrestricted from considering small, unknown companies or other special situations as potential investments. These companies and situations can often provide greater returns than larger, well-known companies. However, larger investment firms usually can’t consider these small investments because it would not make a difference in terms of performance.
Second, we focus the vast majority of our efforts into enacting our investment philosophy to produce above-average returns at below-average risk. Investment performance will often take a back seat at larger firms in favor of client retention. Thus, larger investment firms might unconsciously (or consciously) invest in lower-performing assets that are less volatile in the hopes of not scaring away or angering a client with performance that deviates too far from a benchmark.
We eat our own cooking and love what we do
Although an investment philosophy that makes sense is critical to achieving good results, it is equally important to have an investment advisor that eats his own cooking. Doug Ott of Andvari has a substantial portion of his net worth invested alongside his clients. His financial interests are clearly aligned with his clients.
Finally, Doug loves what he does. He wakes up everyday and goes to sleep thinking about investing. Finding misunderstood and mispriced companies is an exciting puzzle he will never tire trying to solve.