Taking reasonable risks
Over the last year or more, the stock market has split into two types of businesses: those benefiting from the Internet and those threatened by it. Our headline is another way of saying the same thing.
Generally, our portfolios are dominated by Disrupters, but we didn’t find these businesses because of this “theme”. We found them because they exhibit powerful financial symptoms, and we’ve found these companies in a number of different industries. We think we’re on the right track since the investment results over the last few years have been favorable.
So favorable in fact, that clients might wonder if we are taking extraordinary risks in our portfolios. It’s a reasonable worry, and our investment style will inevitably go out of fashion at some point. Still, there are reasons to think that we are somewhat risk averse in our approach.
- We have not traded our way to these better than average results. In fact, portfolio turnover has fallen in the last year.
- We are not looking for the next hot product or trend. We focus our efforts on finding large cash positions in companies, large flows of cash into those companies, and low levels of debt.
- We aren’t focused on stock prices as an indicator of business health. In fact, in the last year we have cut back on some stocks that have performed exceptionally well in the short-term.
Which brings us back to Disruption. We believe the Internet ranks up there with the invention of printing in 1450, and the emergence of the industrial revolution in the 1800’s. And as happened in those major events, we are probably underestimating the power of this invention and longevity of the trends it has created.
Staying on the right side of this historic event, while focusing on financial strength in the businesses we own, should allow us to produce above average results for clients. And, we believe, without taking undue risks.
Daniel A. Ogden