The following is a more
detailed explanation of some of the key investment tenets that
guide our investment decision-making.
"If investing is entertaining,
if you’re having fun, you’re probably not making any
money. Good investing is boring." - George Soros
Investing with a long-term
horizon offers an investor a strong advantage over much of the
professional money management establishment. We've seen firsthand
how many professionals chronically underperform due to their short-term
orientation. They endure too much employment risk if their investment
performance suffers for much more than even one year. This leads
to managers chasing performance, overdiversifying, trading too
much, closet-indexing, window dressing, and ultimately underperforming
relative to their benchmarks.
Measuring investment performance on a quarterly basis is counterproductive
at best, and even overemphasizing annual numbers can be misleading
and result in poor investment decisions. Some of the best investment
opportunities come from deeply undervalued and misunderstood situations
that offer tremendous upside over an uncertain time frame. Having
a longer-term horizon allows us to comfortably hold investments
without being distracted by short-term "noise". It also
keeps turnover and trading costs down.
"When everyone dislikes
something it should be examined. When everyone likes something
it should be examined." - Confucius
investing often means buying into fear and selling into greed.
This translates into buying attractively valued securities when
few others are interested in them and selling/avoiding overvalued
securities that are universally loved.
One of our best investments was aggressively buying energy service
companies in the mid-90's. At that time, oil was trading for $10
per barrel, virtually everyone despised energy stocks, and “The
Economist" was calling for $5 oil. We similarly went long
(bought) gold and precious metal stocks (and short the U.S. dollar)
in the early 2000's when gold was trading at $300/oz and few were
interested in the "old relic."
On the sell side, we escaped harm from the internet collapse of
2000 by recognizing the absurdity of the bubble (admittedly early)
and avoiding the sector. We were also early in warning about the
recent housing bubble and avoided the subsequent decline in housing
and mortgage-related securities.
"The word 'crisis' in
Chinese is composed of two characters: the first, the symbol of
danger; the second, opportunity." - Anonymous
Wall Street likes to pigeonhole
investors into a particular investment style camp - value, growth,
momentum, growth-at-a-reasonable price, etc. We find this distinction
a bit comical. It can be difficult enough at times finding truly
attractive opportunities without limiting oneself to some subset
of the investable universe. We search globally for investments
that we believe have excellent return prospects relative to their
risk, regardless of any Wall Street categorization.
"The worst mistake investors
make is taking their profits too soon, and their losses too long."
- Michael Price
We're able to focus on the
longer-term in part because we focus on sustainable cyclical and
"For some reason people
take their cues from price action rather than from values. Price
is what you pay. Value is what you get." - Warren Buffett
The best business in the
world can be a terrible investment if you pay too much for it.
We are disciplined in valuing investments and will not buy securities
that we believe are overvalued relative to their financial and
We assess valuation based upon a number of measures, including
discounted cash flow analysis, price/earnings, private market
value, price/cash flow, and price/book value. We do not buy securities
that depend upon a "greater fool" arriving to pay even
more. In fact, we are likely to short such securities.
is anticipating the anticipations of others." - John Maynard
We take a global approach
to finding attractive investment opportunities. This means two
things. First, we consider all types of investments - stocks,
bonds, options, currencies, cash proxies, etc., and we consider
the merits of going long (buying) or short (selling) each of these.
In this sense, we operate similarly to many hedge funds but without
the excessive fees.
Second, a global approach refers to considering both U.S.-based
investments as well as international markets. In recent years,
an increasing number of international investment products have
become available to U.S. investors at reasonable costs. This increases
our ability to effectively diversify as well as to exploit undervalued
and unrecognized opportunities.
"Never invest in any
idea you can't illustrate with a crayon." - Peter Lynch
We only invest in securities/companies
that we clearly understand. This is much more unusual than it
should be. Few investors (including professionals) take the time
to truly understand a firm's business, industry, and valuation
or to really comprehend the complexities of some of the securities
Enron is a great example. Before it imploded, we weren't able
to find a single Wall Street analyst who was able to clearly explain
to us how they made money. We never invested.
a protection against ignorance. It makes very little sense for
those who know what they're doing." - Warren Buffett
Most professionals will tell
you that diversification within the stock market and across asset
classes is undeniably a good thing. It is certainly sensible to
a degree, but the benefits of diversification are typically over-emphasized.
The benefits of diversifying across asset classes are based on
relatively short-term historical correlations that are assumed
to be constant. These correlations, however, change through time
and often collapse during market dislocations.
When it comes to stock market investing, we believe that too much
diversification can be a recipe for mediocrity. We also believe
that diversification is often driven more by fear rather than
prudence. Many professionals are overly diversified in an attempt
to ensure that they don't significantly underperform their benchmark
in any period. Of course, this also limits their ability to outperform
and add value for their clients. All else equal, we'd rather own
fewer highly attractive securities that we thoroughly understand
than own a large number of securities that we don’t understand
Ultimately, the ideal degree of diversification within the stock
market and across asset classes will differ for each client based
upon his or her time horizon, goals, and definition of risk.
"My approach works
not by making valid predictions but by allowing me to correct
false ones." - George Soros
"In this business
if you're good, you're right six times out of ten. You're never
going to be right nine times out of ten." - Peter Lynch
Hope is not a strategy, and
even the best investment manager should expect to be wrong at
times. Despite our success over the years, there certainly have
been misses. The key is to recognize these situations and be responsive.
When we buy a security, there is a thesis behind the purchase,
and we closely monitor that thesis. A significant change in the
story or fundamentals may result in a sale. A sale may also occur
if a security becomes overvalued. Finally, we constantly endeavor
to focus on our best ideas. A good security may be sold if those
funds can be put to better use elsewhere.
Buying A Business - Not A Piece Of "Paper"
"Although it's easy
to forget sometimes, a share of a stock is not a lottery ticket.
It's part ownership of a business." - Peter Lynch
Equity represents ownership
in a business. When evaluating a stock, we are evaluating a business;
when we buy and sell a stock, we are buying and selling fractional
ownership of a business. We are not trying to guess as to whether
some piece of paper will increase or decrease in price. We are
evaluating a business, its industry, its prospects, its management
and the valuation of that business. We always ask ourselves whether
we would want to buy the entire business outright.
chief problem - and even his worst enemy - is likely to be himself."
- Benjamin Graham
"As far as I am
concerned, the stock market doesn't exist. It is only there as
a reference to see if anybody is offering to do anything foolish."
- Warren Buffett
Emotional investors seldom
make good investors. Being able to keep a cool head whether your
investments are working for or against you is critical if you're
going to make good decisions over time. As your investment manager,
one of the most important functions Aspera serves is to keep emotions
out of the investment process.
Pulling The Trigger
"A committee is a group
of the unprepared, appointed by the unwilling, to do the unnecessary."
- Fred Allen
It’s not uncommon for
some portfolio managers to spend a great deal of time researching
and debating an investment, always needing to do just a little
more research before making a decision. They suffer from "paralysis
of analysis". In other instances, investment decision-making
is left to committees that invariably tend towards group-think
and backwards-looking "safe" decisions.
At Aspera, there is one portfolio manager who is responsible for
all investment decisions. We know how challenging it can be to
find truly outstanding investment opportunities, so when they
do appear we don't hesitate to take advantage of them.