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We invest in companies that generate free cash flow. Ultimately the value of any asset is the present value of the cash flows it will generate over time. Earnings can sometimes be misleading. Cash flow isn’t.    This is our core investment principle.

 

Additionally we like businesses that have some kind of competitive advantage (could be a government license or concession, economies of scale, low cost of production, patents to name a few). The latter is important because in order to invest for the long term we need to make sure of the durability of the business model. Normally this kind of companies generate above average returns on their invested capital.

 

Following the same line of thought, economic and business downturns are all but inevitable. We need to make sure that the companies we invest in are able to weather them. Thus the importance of a healthy balance sheet and a prudent management with a large economic stake in the company.

 

Finally, a great company can result in a bad investment if purchased at the wrong price. We only buy a stake in a company when we believe to be buying a nickel's worth for a few pennies. We invest when we believe there is value in the price being offered. Volatility in the markets ensure that inevitably, at some point and for many reasons opportunities arise to buy stock in a company at a discount to its true worth.

 

If we are able to buy a business that will grow over time at a good price we benefit from both earnings growth and multiple revaluation, setting us up for a great long term holding. These are the type of investments that ideally one should not need to sell for some time, and the basis for true long term investing. Otherwise one could be investing in “value traps” which we seek to avoid.