INVESTMENT THEMES

  1. Stay Within Circle of Competence:

  • Stick to companies and industries that you know or that you can understand.
  • Stay humble and recognize when your limits of understanding have been reached.
  • Example: Best performing stock since 1987: Not Microsoft or Apple.  Instead, Fastenal, which sells nuts and bolts.  There are numerous “nuts and bolts” companies, no reason to worry about genome therapy or space rockets.
  1. Focus on Owner’s Earnings:

  • Cash Flow in excess of what a company needs to both maintain and reasonably grow its business.
  • Most companies fail this test.
  • Use cash instead to maintain existing business or aggressively grow business.
  • Result = Nothing left over for Owner’s Earnings.
  1. Pendulum Swings Too Far:

  • Good companies eventually stumble or hit roadblocks.
  • Focus turns to any and all BAD outcomes that could potentially occur.
  • Market value swings like a pendulum too far in the “bad” direction.
  1. Limit Downside Risk (Do Not Lose Money):

  • Look for companies where the investment has a low chance of suffering a capital loss.
  • Secure asset values or strong cash flows can provide “value floor”.