Successful business owners look beyond the next few quarters, taking a long-term perspective on maximizing value within their businesses, while enhancing its sustainability and market position. This belief is at the core of our “Invest as Owners” process. Since 1992, we have averaged about 4 or 5 new ideas per year – a fraction of most active strategies and true to our heritage of long-term investors.
We believe profitability is the foundation for determining a businesses’ intrinsic value. As such, defensible, peer-leading profitability is a key element we look for when investing in companies. Sustained multi-cycle, profitability is a rare attribute that considerably narrows down our investible universe.
As growth investors, we expect our businesses to be able to deliver double-digit, annualized profitability growth over a multi-year time-frame. Meanwhile, our discipline with respect to valuation is exhibited in a static discount rate across an investment cycle.
In the end, our “Invest as Owners” process typically yields approximately 20 companies for long-term inclusion within the portfolio.
The investment management business is unlike most businesses in that the “average” product (in this case, investment returns) is unsatisfactory from the consumer's point of view. Managers who outperform their respective peer groups could well be an unsatisfactory experience, as well as for the client, if returns are less than the market index.
Our respect for index investing and investing as business owners has led us to two aspects of our approach that are quite different than our competitors. To outperform an index, we believe that our portfolios must be constructed as different from an index as possible. Thinking and acting like business owners reduces our interest to those few businesses which we believe are market leaders. Both of these views lead to our focused and concentrated approach.
To outperform our peers, we believe we must emulate the most powerful attributes of index investing. By definition, index investing is “buy and hold” investing. This leads us to our history of minimum turnover of our portfolios. As a corollary, this also affects our stock selection. If we expect to invest in companies for many years, we must focus on those select companies with the brightest multi-year prospects for growth. In addition, our view on risk is contrary to the typical manager as well. We do not view risk via individual security price volatility (beta), rather all of our risk analysis is centered on the individual business.
Wedgewood’s underlying equity investment philosophy is predicated on a strong belief that significant long-term wealth will be created by investing as “owners” in companies. In our “Invest as Business Owners” approach, we seek companies that have the following characteristics:
A dominant product or service that is practically irreplaceable or lacks substitutes.
A sustainable and consistent level of growing revenues, earnings and dividends.
A high level of profitability, measured by return on equity without the use of excessive debt.
A strong management team that is shareholder oriented.
Once we have validated company performance against this set of criteria, we then analyze prospective companies with an eye toward those organizations who have reasonable, if not cheap, valuations.
With a history since inception of outperforming index investing and most active managers, our results are testament to the viability of our investment philosophy. It is this approach that sets us apart from our competition…we think and act unlike the vast majority of active managers.