Investment process

We follow value investing philosophy, consisting of purchasing companies below their intrinsic or fundamental value, we buy at a discount.

The majority of our time is dedicated to determining the fundamental value of a company. This is the price which a well-informed market player (a competitor, for example) would be prepared to pay in order to obtain control of its 100%. There are many different methods of determining such value, including market multiples, net asset value or discounting normalized profits or cash-flows, among others.

We buy companies when there is a significant difference between price and fundamental value.

The difference between price and value is the Margin of Safety

Fundamental Value

We believe that a company’s history is a better indicator than its future forecasts, which are generally optimistic.

When calculating the fundamental value of a company we take the following steps:

  1. Research and analysis of the historical annual accounts and balance sheets.
  2. Identification of the business’ competitive advantages, if applicable.
  3. Calculating the company’s capacity to make money throughout the business cycle.
  4. Application of multiples to operating benefits or cash flows the company is capable to generate throughout the business cycle. Combined with discounting cash flows and/or simulating liquidation of the activities.

Margin of Safety

Term coined by Benjamin Graham in his book “The Intelligent Investor”. Based on 2 key factors:

  1. The Margin of Safety represents an “insurance policy” protecting the investor against the probability of making mistakes in the calculations of fundamental value.
  2. It is not a measurement of the revaluation potential of a company, and does not answer the question “how much could this company go up?”. It is simply a discount applicable to the listed price of a business, answering the question of “how cheap can I purchase this company?”

Investment process

We look for cheap companies. Preferably:

  1. Quality companies, with certain competitive advantages.
  2. Managed by honest directors aligned with their shareholders, excellent in the assignation of capital and/or family groups with a positive business history.
  3. Good financial management, with small debt or in the process of debt reduction, or net cash in the balance sheet.
  4. High returns on invested capital.
  5. Ignored and penalized by the market.

Type of company where we usually find value:

  1. Small and middle-sized companies which are generally not noteworthy within the market.
  2. Hidden assets and/or profits, not identified in the accounts.
  3. Companies providing poor results in the short-term in their quarterly results.
  4. Holding companies, or companies with multiple businesses, difficult to understand by the rest of the market.

A continuous process of looking for opportunities, based upon the reading, study and observation of the market environment. There is a high flow of available information, on a daily basis more ideas are raised than it would be possible to analyse. Reading, research, observation, patience and having open minds are the necessary ingredients for a perfect breeding ground for idea generation.

We buy when the trading price a business is below its intrinsic value. We sell when price and value converge, regardless the time frame. Patience is one of our main competitive advantages.

Investing in the stock market is most intelligent when it follows a business approach. We are investors, not traders, we do not speculate about the future of the businesses. We follow a family business culture: in the asset management, in the portfolio and in our investments.

Fruit of independent thinking, our ideas may be contrarian to the consensus opinion, which by definition cannot be independent. We look for investment ideas not subject to consensus opinion. Companies which have been heavily burdened, which are no longer in fashion or hated by the market may lead to good long-term investment ideas.

The herd behaviour of human beings, and in particular of investors, is an intrinsic factor ever since birth. People feel scared of going away from the herd, feel insecure when thinking differently to the rest, they fear for their job if they speak out against the beliefs of their boss. All this leads to being comfortable and safe within their comfort zone, making the same decisions as those around them. Getting out of such comfort zone may have detrimental repercussions for the majority of those who try to, being a sufficient incentive to remain within the herd and consensus decisions.

Investors and market players as a whole usually endure shared investment errors better than individual errors, by reason of fear of seeming ridiculous, or what is even worse, by fear of losing an employment position. This accentuates even more the herd behaviour.

We shall obtain different returns to the rest to the extent that we are capable of making different decisions to the them.

The market is dominated by emotions which oscillate between fear and greed, in particular in the short-term. We are reluctant and demanding when everyone wants to buy regardless the price, in market periods in which greed predominates.

We are interested in market periods when no-one wants to buy, when people are prepared to sell at any price, usually below than fundamental value, moments in which fear dominates. Experience has demonstrated that the best investment opportunities appear at the worst moments of feeling.

Our portfolio is concentrated in a small number of companies, as a reflection of our conviction in our ideas. Ae have a low turnover, reduced number of sales and purchases, and long holding periods.

Agnostic approach to market benchmarks. We do not replicate any index, nor do we hold positions in relation thereto. We purchase cheap companies capable of obtaining better returns than the rest, irrespective of whether they are or are not included in indices.

We do not specifically promote investments in relation to any particular country, size of company, sectors or type of business. The companies which are included within our portfolio are there by reason of the respective merits.

We believe that the implementation of restrictions in relation to countries, sizes and sectors generates inefficiencies which may be taken advantage of by investors without said restrictions, such as Magallanes.

  • Focused exclusively upon the selection of companies
  • Purchasing cheap companies where market price is below fundamental value
  • Risk control by purchasing with high margin of safety and through in-depth knowledge of the companies
  • Investors (we purchase cheap today) vs. Speculators (based on future forecasts)
  • We do not predict the future, nor do we forecast upward or downward market trends, we focus on identifying companies with value
  • Little attention paid to macroeconomic events
  • Idea generation is a continuous process of looking for opportunities
  • We search for companies ignored by the market
  • Leverage aversion, companies with net cash assets, little debt
  • Concentrated portfolios, high belief in our ideas
  • Low turnover, few operations per year
  • Without restrictions for size, country, sector or type of business
  • Sceptical toward indices
  • No use of derivatives. We do not carry out short selling and do not have stop loss
  • Liquid portfolios
  • Patience and discipline
  • Honesty and integrity
  • Co-investment