We're looking for companies with weakening moats, often coupled with a resulting deployment of capital into areas in which they have no competitive advantage. Even better is when they're deploying not just excess capital, but leveraging the balance sheet to do so.
One exercise we go through on all our most interesting ideas is what we call balancesheet optimization. It's our term for debt recap. What can management do, fully under the detail matters. It's one thing to say incremental margins are X percent, but we need to show all the detail used on things like pricing [...]
Our reference to “misunderstanding” among our investment values refers to our having a variant perception versus consensus with respect to the earnings power or the free-cash-flow-generating potential of the business. Some misunderstandings come from Joel Greenblatt You Can Be a Stock Market Genius-types of events such as spinoffs, emergence from bankruptcy, and recapitalizations where the [...]
We’ve struggled to underwrite moats based on intellectual capital, say in a company like Qualcomm, where its earnings power is enormous if all its patents hold up. That’s another reason we’re not active in things like pharmaceutical or biotech companies.
Circle of competence essentially comes down to whether we understand the business. There are several sub-questions under that: Do we know the right people in the industry? How well do we understand the products and the customer decision-making process? Are there unanalyzable things that could have a big impact? No matter how well you understand [...]