Patience & Discipline
We believe that successful long-term investing should begin with the goal of preserving capital in down markets. Our time-tested process has shown us that patience and discipline are necessary in the absence of obvious bargains. We are willing to hold cash at the expense of relative returns when we are not able to find companies trading at a substantial discount to our conservative estimate of intrinsic value.
We are absolute return-oriented and employ a fundamental investment discipline when managing the Castle Focus Fund. This discipline starts with a measurement of the intrinsic value of a business in relation to the price of its shares. The higher the quality of the business in terms of financial strength, free cash flow, earnings growth and internal rate of return, the higher our view of intrinsic value and the more we find the investment attractive.
Investments are ideally made at a significant discount to our view of a company’s current intrinsic value. This allows us to invest with a margin of safety, as we strongly believe that the price paid for a company is ultimately a key driver of total return. By adhering to the principles of intrinsic value and margin of safety, our investment philosophy typically runs counter to the general market psychology. The buying and selling of companies is therefore based on investment discipline, not popular opinion.
A Long-Term Approach to Investing
Years of experience have taught us that investor perceptions of an equity security can fluctuate much more widely than underlying fundamentals. Thus we believe it is difficult, if not impossible, to predict short-term price movements. We look further out in our analysis (generally 3 to 5 years) beyond readily apparent short-term information. As our view diverges from the consensus, we find investment opportunities.
For each position in the Fund we use original research to write an investment thesis that looks at least three years ahead. Through our own investigation, we can more completely understand the forces that may either drive a company forward or slow its progress. Because we have independently built the case for our ideas, we have the confidence to invest in out-of-favor businesses and to hold our ground when short-term sentiment is counter. In our experience, periods of great pessimism often generate the best investment opportunities.
Strict Price Discipline
We believe that a low entry price for each security position is a key driver of future returns. First, a low stock price may incorporate low investor expectations that can serve as a buffer against the risk of decline. We are guided both in what we buy and what we sell by an ongoing search for superior value, often steering clear of popular choices that come at a price we would rather not pay. Second, we believe investing when valuations are low creates greater potential for capital appreciation.