Applying value investing principles, we invest primarily in equity, as well as debt and convertible securities. These are held both for longer-term capital appreciation and shorter-term gains, and usually fall within one or more of our Value, High Quality or Special Situations categories. We aim to invest in companies that will provide us with investment returns that exceed benchmark returns.
The weighting of our investments among various sectors changes over time, with a view of maximizing the total value of our portfolio and without regard to maintaining particular sector allocations. However, we also believe in sticking to ones circle of competence so spend the majority of our time and energy looking for opportunities in the technology sector.
We typically seek to take equity positions of between 5% and 10% of our portfolio (though our positions may from time to time reach or exceed 20%). Where warranted, we have taken and will consider a more active role by advising management of our portfolio companies and/or placing one or more nominees on their boards of directors. In these circumstances, we will work with management of a portfolio company to help it unlock value by providing strategic counsel in areas such as financing, operations, capital structure, potential acquisitions and exit strategies.
We evaluate securities of an issuer by considering a variety of factors and will make an investment if we believe the company falls in one of these categories:
- Value: These companies are inexpensive based upon common valuation metrics. These investments are not usually high quality long-term holds, but we can expect a reversion to the mean, possible multiple expansion and/or take-outs to provide above average returns. A significant margin of safety is required for this type of investment.
- High Quality: A high quality company usually has one or more of the following; a durable competitive advantage, is highly profitable, has attractive returns on incremental capital and/or good management teams/capital allocators. These businesses usually trade at a premium but are sometimes temporarily mispriced. An investment in a High Quality business has the potential to be held indefinitely, but these investments are very rare.
- Special Situations: there are a variety of special situations which may offer above average returns. Some of these include: large private equity/venture capital overhangs, aging owners/majority shareholders, unhappy or activist investors, management changes, increased outside shareholder concentration and takeover bids. Most of these situations will require a catalyst and a reasonable margin of safety.
Though it would be simpler if each investment fell in a single category, it has been our experience that the characteristics of individual companies will instead cause them to fall somewhere on the spectrum between Value and Quality, with Special Situations distributed throughout.