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Concentration Value Patience

Concentration

We believe that the key to our investment success in the past and on into the future is that we concentrate and focus all our resources, energy, research, and time into a few, select opportunities which we assess to be deeply undervalued and where we view the risk/reward profile as highly skewed in our favor.

At Focus Capital Management, we aim to invest in just 4-5 positions at any one time. We believe that this highly concentrated approach is the root of our success, offering many benefits:

  • Concentration means that we select only our most compelling investment ideas. We pick great investments, and we don’t dilute them with ideas that are mediocre or merely good.

  • Concentration allows us to do deep research and analysis and to really understand the company we are investing in –its inner workings, its competitors, its industry –everything about the investment.

  • Concentration drives higher returns by allowing our winners to really move the needle for the overall portfolio.

  • Concentration reduces risk by our thoroughly vetting and stress-testing every investment in a way that would be impossible to do if we weren't so concentrated.

  • Concentration allows us to closely monitor our positions, keeping up-to-date and informed on any news potentially impacting the company or industry.

Value

We believe that investing is all about intrinsic value. By investing in situations where the share price is temporarily depressed vis-à-vis the true intrinsic value, we profit as the intrinsic value shines through over time, while at the same time lowering our risk of downside through the included Margin of Safety. Price is what you pay; value is what you get.

At Focus Capital Management, we aim for each position to return at least 2-3x over the life of the investment. By buying deeply undervalued stocks, we both raise our returns and reduce our risk. The beauty of Value investing is that, unlike other styles of investing, the same source that brings superior returns (i.e. purchasing the stock when it is deeply undervalued) actually reduces risk by acting as a buffer, a Margin of Safety, for an unanticipated shock or the inevitable mistake.

Value investing is simply to focus on the gap between the share price and intrinsic value. Whether it’s a stable or even declining business with an overly pessimistic share price or a fast-growing business with an optimistic share price that still falls short of true intrinsic value, the goal is the same. To buy companies where intrinsic value received is significantly greater than the share price paid.

The underlying basis of Value investing is the following fundamental truth: Stock prices are often wildly wrong. Just witnessing the drastic swings from 52-week highs to lows affirms this fact; volatility in stock prices is far greater than the volatility of the underlying business realities.

But it is not enough for stock prices to often be wrong. A successful investor has to discern when they are wrong and in what direction they are wrong. The key to this is what we call The Art of Saying No. As a concentrated value investor, we do not need to have strong opinions on every stock, or even most stocks. We wait for the fat pitch, where we have high conviction that a stock is deeply undervalued. Then, we can hit it out of the park!

Patience

We believe that the successful investor is the patient investor. Trading may be all about speed; investing is about patience. It takes time for the future to unfold, for an investment thesis to play out, and for price to converge with value. The successful investor needs to stick to their conviction and ride the ups and downs of the market for long-term success. Patient investing means investing for the long-term.

At Focus Capital Management, we strive to be patient throughout the investment process; patient on the way in, patient on the way out. In general, we invest expecting our thesis to play out over a 2-3 year horizon. Often, however, even after significant price appreciation, the underlying intrinsic value rises in tandem and the stock remains undervalued. Multi-year holding periods are the norm for Focus Capital Management.

Patience means to be deliberate in our purchasing decisions, taking our time to research all aspects of the business. We typically research a company for a minimum of 2-3 months before pulling the trigger.

Patience means to not react hastily and emotionally in response to day-to-day news flow. Responding to the moment almost inevitably falls prey to emotional investing. Taking the long-term view allows clear thought and impartial analysis to rule.

Patience means we award ourselves no points for speed. We are not attempting to buy at the absolute bottom, nor are we attempting to sell at the absolute top, and we are not at all interested in being first with our hand on the buzzer. When a piece of news about a portfolio company hits the wire, we do not want to be the fastest to react. We want to be the most deliberate, most thoughtful, most knowledgeable to react. We want to take our time, digest the news, mull it over, and place it in broader context of our deep understanding of the company and its business.

Patience means to stay invested in the market for the long term, committed through thick and thin, in good times and bad, to reap the benefits of the market’s relentless march upwards over the long term. The lesson of history is clear: do not try to time markets.

Patience means to tame the temporary swings of volatility. Take advantage of the blessing of constant liquidity to scoop up shares in quality companies on the cheap, but do not fall prey to the curse of constant liquidity. Do not be scared off by Mr. Market’s periodic fire sales. Ride out the storm. This too shall pass. With a deep understanding of the company’s underlying business, we wait patiently for the share price to appreciate to the true intrinsic value.


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