Our Valuation Process

The word ‘value’ has different meanings to different people, and is a label that is sometimes used to categorize a type of investor. In our view, you cannot separate the two characteristics of growth and value. We want to own growing, highly profitable businesses, but we believe that it would be a mistake to overpay to own them. Our price discipline is strong. We believe in pursuing an exhaustive valuation process for each company. The key, and the art, is in finding those situations where the judgments we have made are not widely held by others.

To us, the stock market is simply the pricing mechanism for a variety of businesses. At times, the owners of those businesses are wildly optimistic about the future and this shows up in higher bids for their stock. At other times, pessimism is rampant and others will offer absurdly low asking prices for their businesses. The reality is that the true economic values of these businesses do not fluctuate as wildly as their stock prices do. Our job is to try to determine the value of businesses and exploit the opportunities created by the market.

We build detailed discounted cash flow models to help assess the value of a business. This modeling process requires an exhaustive review of historical financials, which teaches us about the economics of the business (as well as its successes and failures). Having our own model of a business allows us to make independent, proprietary forecasts and it provides a tool for testing different scenarios. In our future assumptions, we try to be conservative. We would rather adjust our numbers upwards as a business develops than have to depend on a company always meeting inflated expectations. We attempt to get input from management after building these models to help improve their accuracy.