OUR INVESTMENT PHILOSOPHY
As long-term investors, we begin with the premise that a stock is a piece of a business; the underlying value per share of that business will eventually be reflected in the stock price. Therefore, intelligent investors can buy a stock when its price is far below the company’s intrinsic value and sell as its price approaches or exceeds its intrinsic value. This method lowers the risk of permanent capital loss when practiced pragmatically.
Our goal is to find the companies that have the greatest chance of compounding their intrinsic value during our hold period. We believe this is most likely to occur when companies have defensible economic moats; are run by outstanding managers who own a significant share of the company; and have the ability to grow per-share value through astute reinvestment by management.
We focus our research on companies that have three primary characteristics:
Incentives are among the most powerful influences in nature. Owner-managers have a tremendous economic incentive to grow the business over the long term due to their large ownership share. The best way a CEO can be truly aligned with minority shareholders is by owning a significant share of stock relative to the CEO’s current income and to his/her estimated net worth. We also assess management’s integrity, capital allocation acumen, competitive drive and operational excellence.
When we can identify these characteristics in companies that also happen to be “off the beaten path,” our portfolio is positioned to benefit from a tailwind once the broader investment community embraces those stocks as well. Thus, our favorite hunting grounds are in the small cap and micro cap space, where companies may have decades of growth ahead of them; or among spinoffs or restructurings where historical earnings and other uncertainties have kept them under investors’ radar.
OUR INVESTMENT STRATEGY
A common problem investors experience is that they tend to swing too often, to use a baseball analogy. Humans have a natural bias toward taking action, and this exposes investors to several risks: unfamiliarity with an investment’s downside risks; irrationally high diversification; and undisciplined, costly churn in the portfolio. This is true of both individuals and professional investors operating under institutional imperatives. However, the opposite problem is equally harmful to long-term results: discovering a rare, “fat pitch” but being unable to swing with the full weight of one’s capital when the odds are greatly in one’s favor.
We manage a concentrated, long-only portfolio, typically numbering between 8 and 20 stocks, weighted heavily in our highest-conviction ideas.
We have the patience and confidence to tolerate long periods of inactivity when few opportunities meet our requirements; or when companies we own are increasing their intrinsic value but the market is not recognizing their progress.
Because our investors embrace our philosophy, we can leverage our ability to tread off the beaten path to our advantage. Thus, our strategy includes uncovering situations where where the potential upside is uncertain (but possibly convex), yet the downside is well-known and limited.
An example is a company whose price appears to fully reflect its recent net earnings, but our research indicates that the owner-manager’s investment in a future growth opportunity has been weighing those earnings down. We may determine that whether the project is completed or abandoned, its expense will abate and the remaining core earnings from a moat-advantaged business provide protection against the downside. The market may disapprove of the speculative project, so the stock price implies no chance of success as well as a belief that the project’s expense will offset core earnings indefinitely. Such a situation may represent a case of “heads, we win; tails, we don’t lose much.”
Our ability to accept uncertainty that most fund managers cannot is thus a source of opportunity.
This strategy hinges on the primacy of avoiding permanent loss of capital.
HVC manages the risk of permanent capital loss by:
MANAGER
Founder and Managing Partner at Hunter Value Capital. Ian holds an M.B.A. in Global Finance and Business Law from the Leonard N. Stern School of Business at New York University and a B.A. from Southern Methodist University. Ian is a CFA charterholder.
Prior to founding Hunter Value Capital, Ian was the Director of Valuations at Savanna, a private equity fund manager in New York City. Previously he spent a decade on Wall Street in equity research, credit analysis and corporate lending.
