The Fund

We look first for durable companies that we believe have bright prospects and limit our investments to those that pass our rigorous tests. Only after this assessment positively identifies an investment opportunity do we work to establish what we believe is a reasonable estimate of the company’s intrinsic value. We then require the stocks we add to our portfolio to be trading at a substantial discount to our estimate of that intrinsic value.

We do extensive fundamental research to identify companies with these characteristics. The attributes we look for include strong and durable competitive advantages, high and sustainable returns on invested capital, competent and shareholder oriented management, long term growth opportunities, and sustainable levels of debt.

In determining whether a particular company may be a suitable investment, we examine:

• The source of its competitive advantage such as powerful network effects, a compelling brand, high customer switching costs, and differentiated product or service offerings.
• The management team’s track record and focus on capital allocation, maximizing returns on capital, and commitment to shareholders.
• The economics of the business such as the existence of pricing power, returns on new capital, cash flow characteristics, and the stability and expansion potential of profit margins.
• The outlook for the company’s products or services including the expected future demand for those products or services, the stage of the product lifecycle, potential scalability of the business model, and the existence of a recurring nature to the company’s sales.

The focus of our investment process is in identifying the small number of companies that we believe have the ability to potentially produce a relatively predictable stream of cash flow generation. It is these companies that we believe we have the capacity to make a reasonable estimate of their intrinsic value and therefore identify those times when the market price of their stock offers a compelling investment opportunity.

While we believe we can identify these relatively rare companies, we also acknowledge that the large majority of companies have relatively unpredictable futures. We believe that most investors, including ourselves, are unable to make a reasonable estimate of the intrinsic value of the large majority of publicly traded companies or of the stock market as a whole (which of course is largely made up of these unpredictable companies). Our view on these other companies and on the market as a whole is not negative, but simply agnostic. Rather than seeking to pass judgement on all investment opportunities, we restrict our investments to those we think we can make an informed decision about and decline to hold an opinion about investments that do not pass this test.