Investment Approach
We believe that, in the long run, the economics of a business drive its investment returns. This one idea shapes everything we do. We look for high-quality, growing businesses that can generate predictable, above-average economic returns over long periods of time, protected by a competitive advantage that is durable and hard to copy.
There are a number of ways to express this view. We think the most sustainable is to own companies that grow by winning customers, taking market share and reinvesting in their own business, rather than those that grow earnings by cutting costs, buying other companies or using financial engineering. We don't see growth and value as opposing styles. A business that reinvests its earnings at a return above its cost of capital creates value as it grows. One that reinvests below it destroys value, however fast it grows. Growth is only worth paying for when it is profitable.
We think the market makes two consistent mistakes. Firstly, it underprices companies in the growth phase of their lifecycle, because it focuses on near-term earnings rather than on how long the business can keep growing. Secondly, sentiment swings far more than the underlying value of a business does. Taking advantage of both requires patience, so we judge our results over rolling five-year periods, not the next twelve months.
Patience only pays off if our forecasts can be relied on. We value businesses on earnings many years into the future, so predictability matters as much as growth. For this reason we rarely invest in businesses whose outcomes depend on a single project, such as mining exploration or early-stage biotech. We can't say with confidence that they'll still be in the portfolio in five years, or still solvent in ten. Equally, a business that harms its environment, its people or its stakeholders puts its own future earnings at risk, so we treat sustainability as part of the economics, not as a separate box to tick. We look for businesses that can become much bigger, with a high degree of certainty, and we would rather own a smaller number of companies we understand deeply than many we understand only partly.
Once we own a business, we intend to hold it for a long time. We don't sell because a share price has moved. We sell when the investment thesis has played out or has broken. An unexpected departure of senior management, or a large acquisition that changes the nature of the business, is enough for us to step aside. Capital is allocated across the portfolio according to each company's expected return, through a documented process, so no single person decides what we buy, how much we hold, or when we sell.
We believe a manager should be able to explain not only what returns they delivered, but how. If our philosophy is right, most of our returns should come from choosing the right companies, not from sector bets, broad market factors, currency or market timing. That is what we've delivered: in the decade to [2021], stock selection accounted for roughly [90%] of our outperformance after adjusting for sector exposure, and about [70%] after adjusting for style factors.
When we founded the firm, we made three promises: we will never speculate to generate returns, we will buy high-quality businesses and hold them for the long term rather than trade them, and we will not diversify to cover up for poor research. As custodians of our clients' money, we think that's the only honest way to invest it.
