INVESTMENT OBJECTIVE
The primary objective for all of our portfolios is to achieve the maximum long-term, after-tax, total return on capital that is obtainable with the minimum risk of permanent loss.
INVESTMENT STRATEGY
To reach our investment objectives, Sire Line Capital utilizes a long-term value strategy. Value investing, which is a set of principles that form a philosophy of sound investing, involves identifying a company's underlying economic value and investing only when its stock price is trading at a significant discount to this underlying value. The foundation of our investment philosophy is based on a combination of the sound, quantitative lessons of Ben Graham and the proven, qualitative lessons of Philip Fisher. Sire Line Capital manages concentrated portfolios, usually consisting of 20-to-30 high-quality companies. Our investment approach controls portfolio risk primarily through the quality and purchase price of the businesses in which we invest.
VALUE INVESTING
The first seeds of value investing were planted by Benjamin Graham and David Dodd in the early 1930s in their book titled Security Analysis. From 1928 to 1955, Graham taught an investment course at Columbia Business School. Warren Buffett, the most recognized value investor today, was a student of Graham's at Columbia, where Buffett graduated in 1951. Over the next sixty-plus years, Buffett took the lessons that he had learned from Graham, which were mostly quantitative in nature, and blended them with more qualitative lessons from other important influences―mostly Philip Fisher and Charlie Munger―to create a more modern version of value investing than the one Graham and Dodd taught. In the early 1990s, Bruce Greenwald revitalized the investment management program at Columbia Business School—picking up where Graham, and his successor, Roger F. Murray, left off—by reintroducing value investing into the curriculum and incorporating Buffett's modern version into his lectures. Warren Buffett is a frequent guest in Bruce Greenwald's value investing class at Columbia Business School. Sire Line Capital's founder, Daren Taylor, was a student in Bruce Greenwald's Value Investing Program at Columbia Business School, which is where he received his M.B.A. in 2003.
The foundation of value investing is rooted in the belief that there is no fundamental difference between buying a business outright and buying individual shares in a business. At Sire Line Capital, we never lose sight of the fact that stocks represent ownership in businesses that create goods, services and wealth. They are not simply pieces of paper to be shuffled and traded like cards in a poker game.
We believe it is more appropriate to judge the success of our investments by the underlying operating performance of the business over the long term, not by short-term, often volatile, price quotes. We believe price inevitably follows operating performance.
What makes our value philosophy stand apart from the rest is that it segregates information affecting valuation into distinct categories and focuses on that information which is more tangible and reliable to calculate a company's true economic worth.
When calculating a company's underlying economic value, we focus on that information which is more tangible and reliable―the balance sheet and current cash earnings power―rather than that which is less reliable―reported GAAP earnings and uncertain future growth. Digging into a company's financial reports takes time and energy. Since the average mutual fund holds well over 100 stocks and has an investment universe running in the thousands, most professional money managers try to simplify the valuation process by relying on a multiples-based approach to valuing a business. The most commonly used multiples-based approach is the price-to-earnings (P/E) ratio. We believe that the widespread use of the P/E ratio as a primary valuation measurement is one reason why most professional money managers and individuals under-perform the broad market over the long term. P/E ratios have many weaknesses. First of all, P/E ratios are really just a shortcut to the dividend discount model, which is a flawed valuation tool. In addition, P/E ratios do not reflect a company's balance sheet, which is often a significant source of value for a business. And finally, the calculation of earnings ("E") in the denominator in P/E ratios is based on a less than perfect accounting system known as GAAP. Generally Accepted Accounting Principles (GAAP) are the widely accepted set of accounting rules, standards and procedures that companies use for reporting financial information. GAAP reporting is required by companies so that investors have some consistency in the financial statements they use when analyzing companies for investment purposes. However, these generally accepted rules for accounting have grown so complex over the years that their utilization is plagued with opportunities for misuse by both companies and investors.
We prefer to focus on a company's balance sheet, underlying cash earnings power and free cash flow, rather than reported GAAP earnings, to value a business. Free cash flow tells us how much cash we could theoretically take out of the company, after all capital expenditures are made to maintain the assets and support the current earnings power of the business, if we owned the entire company. In determining the current earnings power of a business, we spend a great deal of time analyzing how growth-related capital is being accounted for and how it impacts the income statement.
To confirm our estimation of intrinsic value, we compare it to private market values for similar businesses.
The foundation of value investing is rooted in the belief that there is no fundamental difference between buying a business outright and buying individual shares in a business. At Sire Line Capital, we never lose sight of the fact that stocks represent ownership in businesses that create goods, services and wealth. They are not simply pieces of paper to be shuffled and traded like cards in a poker game.
We believe it is more appropriate to judge the success of our investments by the underlying operating performance of the business over the long term, not by short-term, often volatile, price quotes. We believe price inevitably follows operating performance.
What makes our value philosophy stand apart from the rest is that it segregates information affecting valuation into distinct categories and focuses on that information which is more tangible and reliable to calculate a company's true economic worth.
When calculating a company's underlying economic value, we focus on that information which is more tangible and reliable―the balance sheet and current cash earnings power―rather than that which is less reliable―reported GAAP earnings and uncertain future growth. Digging into a company's financial reports takes time and energy. Since the average mutual fund holds well over 100 stocks and has an investment universe running in the thousands, most professional money managers try to simplify the valuation process by relying on a multiples-based approach to valuing a business. The most commonly used multiples-based approach is the price-to-earnings (P/E) ratio. We believe that the widespread use of the P/E ratio as a primary valuation measurement is one reason why most professional money managers and individuals under-perform the broad market over the long term. P/E ratios have many weaknesses. First of all, P/E ratios are really just a shortcut to the dividend discount model, which is a flawed valuation tool. In addition, P/E ratios do not reflect a company's balance sheet, which is often a significant source of value for a business. And finally, the calculation of earnings ("E") in the denominator in P/E ratios is based on a less than perfect accounting system known as GAAP. Generally Accepted Accounting Principles (GAAP) are the widely accepted set of accounting rules, standards and procedures that companies use for reporting financial information. GAAP reporting is required by companies so that investors have some consistency in the financial statements they use when analyzing companies for investment purposes. However, these generally accepted rules for accounting have grown so complex over the years that their utilization is plagued with opportunities for misuse by both companies and investors.
We prefer to focus on a company's balance sheet, underlying cash earnings power and free cash flow, rather than reported GAAP earnings, to value a business. Free cash flow tells us how much cash we could theoretically take out of the company, after all capital expenditures are made to maintain the assets and support the current earnings power of the business, if we owned the entire company. In determining the current earnings power of a business, we spend a great deal of time analyzing how growth-related capital is being accounted for and how it impacts the income statement.
To confirm our estimation of intrinsic value, we compare it to private market values for similar businesses.
GOOD-WILL GIANTS
WHAT ARE WE LOOKING FOR IN A GOOD BUSINESS?
We are looking for “Good-will Giants.” By this we mean we are looking for great companies that are easy to understand, that consistently earn more than their cost of capital and whose earnings are protected from competitive forces. We are looking for companies that generate significant cash, not consume it. We are looking for businesses that possess some sort of sustainable competitive advantage. We are looking for companies that are managed by honest and talented people whose interests are aligned with ours. We are looking for companies whose underlying economic value is growing at least as fast as the market. And finally, we are looking for companies whose business economics have performed better than their stock price.
WHAT ARE WE NOT LOOKING FOR?
We are looking for “Good-will Giants.” By this we mean we are looking for great companies that are easy to understand, that consistently earn more than their cost of capital and whose earnings are protected from competitive forces. We are looking for companies that generate significant cash, not consume it. We are looking for businesses that possess some sort of sustainable competitive advantage. We are looking for companies that are managed by honest and talented people whose interests are aligned with ours. We are looking for companies whose underlying economic value is growing at least as fast as the market. And finally, we are looking for companies whose business economics have performed better than their stock price.
WHAT ARE WE NOT LOOKING FOR?
- Businesses that are difficult to understand.
- Businesses that consume more cash than they generate.
- Companies that feel the need to buy growth.
- Restructurings, which is another term for mistakes.
- Turnarounds (they seldom turn).
- Management teams that participate in mindless imitation of peers.
- Commodity-type businesses which have little or no protection from competitive forces.
- Structurally disadvantaged businesses that need a catalyst to unlock their potential value.
- Companies in which the job of managing the firm is more lucrative than maximizing shareholder value.