A VALUE-ORIENTATED INVESTMENT PHILOSOPHY
WE ONLY BUY SECURITIES THAT WE BELIEVE ARE TRADING AT A SIGNIFICANT DISCOUNT TO OUR ASSESSMENT OF INTRINSIC VALUE
Palm Harbour Capital follows a value-orientated investment philosophy. In its most basic form this entails determining the intrinsic value of a security and then purchasing it when it is trading at a significant discount to this value.
We believe purchasing a security at a steep discount to its intrinsic value is prudent because business valuation is an imprecise art and unexpected events regularly occur.
We benefit from both the low price at which we buy the security as it corrects and the compounding of the intrinsic value as we patiently wait for the market to realize the value. We believe there are a number of important concepts necessary to follow our chosen philosophy:
• Taking an owner’s perspective. We view equities as partial ownership of a company, not pieces of paper to be traded. This viewpoint allows us to think like long-term business owners and make decisions in the best interest of the company and our investors.
• The market price is often wrong. There are a number of reasons for this, including constraints placed on institutional investors, behavioural biases, short-termism, trading liquidity and the rise of passive investment vehicles.
• Focus on downside risk and preservation of capital. Greed drives many market participants. Compounding capital only works if you do not lose it first. This means finding investments with high return potential but also limited downside.
• Absolute return focus. We do not focus on any given index or peer group. We focus on finding ideas that are great investments.
• Long-time horizon. Good ideas often require patience and as the market is often short-term orientated, we try to use short-term volatility to our advantage.
• Long-term development of the business. Seeking businesses with sustainable competitive advantages that have growth opportunities to compound for us (high returns on tangible capital coupled with growth opportunities).
• Constant improvement, learning from mistakes. We are cognizant that no process is perfect, and we will make errors. We strive to continually refine and improve our processes and build our knowledge base
• Volatility is not risk, rather, it provides opportunities. Risk is the probability of a permanent impairment of capital..
• Contrarian. We often take unloved views against the conventional wisdom.
We believe we can only execute these tenets by
- In-depth research; deep knowledge of the assets
- Adherence to a well thought-out, disciplined, unemotional investment process
- Confidence in one’s own analysis and judgment – ability to tune out market noise
- Long-term time horizon
Clients who share our philosophy and investment process and understand we are often contrarian.
No investment philosophy, no matter how sound, works well all the time.
LOOKING FOR A WIDE VARIETY OF OPPORTUNITIES
WE LOOK FOR SITUATIONS IN WHICH SELLERS MAY HAVE MOTIVATIONS BEYOND THE UNDERLYING FUNDAMENTALS AND VALUE OF THE BUSINESS
We source ideas from a variety of places, having followed hundreds of European companies for many years. We look at a wide variety of special situations as they develop, such as spin-offs, privatizations, changes of management, divestitures, bankruptcies, and rights offers. We look for situations in which sellers may have motivations beyond the underlying fundamentals and value of the business, allowing us to buy at bargain prices. We have extensive networks in both the corporate and the investing communities. We follow many industries closely, including reviewing the relevant trade journals and speaking with industry participants.
Once we have identified a potentially interesting investment, we then carry out intense due diligence. We read primary sources such as company filings and establish the nature of the business and why this opportunity might exist. If still interesting we do thorough industry and company specific analysis to hone in on the key, value added questions. We then seek out industry experts to help us answer these questions. We play devil’s advocate and run a number of stress tests. We track a number of variables closely for each investment to check our thesis.
Ultimately, we aim to construct a diversified portfolio of high-quality compounders and special situations, which we then monitor closely. We invest opportunistically and exit positions as they approach our intrinsic value range, if the thesis proves incorrect or if a better idea is found.
Our process is straightforward, disciplined and we aim to keep it as consistent as possible. We have rigorous risk controls both before making an investment, whilst we own the investment and holistically at the portfolio level.
“Investment is a long-term business where performance is underpinned by patience.”
“Because investing is as much an art as a science, investors need a margin of Safety. A margin of Safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world.”
“The secret to investing is to figure out the value of something – and then pay a lot less.”