SVC Investment Principles
- My first priority is to protect our capital from permanent loss by buying high-quality businesses at prices well below what they’re worth.
- My second priority is to earn an above-average compound return on our capital over any five-year period. While I prefer a five-year measuring period, a minimum of three years is required to minimize the role of luck involved in the results.
- Purchasing a stock means that you are purchasing a partial stake in the underlying business. The results for a long-term investor will largely be determined by the results of the underlying business. Having a business perspective when purchasing and owning stocks helps remove the daily noise of market commentators and price fluctuations and allows me to focus on what is most important to a long-term business owner.
- I align my interests with my investors’ interests through (1) having a fee structure that rewards me only when my investors do well and (2) having the majority of my immediate family’s net worth invested alongside my investors’ capital. I eat my own cooking.
- Risk is the likelihood that a business we own will decline in value and/or when we pay too much for a business at the outset. General finance theory defines risk as price volatility, or beta, meaning that the more the price of a stock moves, the riskier it is. While price volatility can lead to short-term, unrealized losses for a long-term investor, it does not equal risk.
- Short-term, unrealized losses provide us with opportunities to invest in the businesses I like at even better prices.
- I don’t invest in stocks with the intention of getting out at a certain price. If the businesses we own continue to increase in value and aren’t selling at prices well above what I believe they’re worth, I have no intention to sell.
- I do not try to time markets or forecast the future.
- I’m flexible in the amount of cash we have sitting idle, i.e., not invested in businesses. It is solely dependent on the quantity of good investments available to us. However, when general price levels in the market are relatively high, good ideas are harder to come by and our cash level will most likely be higher. When general price levels are low, good ideas are more readily available at prices I like and more of our capital will most likely be deployed.
- Independent thinking is critical to sustained outperformance, but it’s not enough on its own. I also must be correct. Following the crowd will lead to average performance at best and independent, but incorrect, thinking will lead to below-average performance.
- I always want to be investing from a position of strength. That means using little to no debt and having cash available to invest when great opportunities are available.
My ideal portfolio consists of 10 to 20 stocks, with the majority of our capital invested in my top three to five ideas.