Old West's investment philosophy stems from Ben Graham's classic observation that "investing is most intelligent when it is most business-like". That means that we don't view stocks or bonds as financial instruments that trade up or down; instead, we view them as equivalent to private ownership or creditor stakes in the underlying businesses. Simply, we consider ourselves business people who merely transact through publicly-traded securities.
In every investment we make, we seek a margin of safety in terms of price paid relative to business value received. Buying at a discount to intrinsic business value not only offers a magnified prospective return but more importantly provides a buffer against all the things that can and often do go wrong. With that said, it's often not enough to buy something just because it's cheap, so we also spend a lot of time trying to understand what will make a company's stock price appreciate. We try to identify situations where we believe we have unique insights or can identify catalysts that the market will eventually recognize.
A focus on people forms the core of Old West's investment process. As a first principle, we believe that the soundest way to protect and grow our capital is by aligning ourselves with management teams who have high stock ownership and smart pay. It is our contention that incentives matter deeply, and that there is no surer way to understand the character and motivation of a management team than to study how they get paid. In the five minutes that it takes us to look at stock ownership, pay levels, and the business metrics that drive incentive pay, we are able to intelligently eliminate over 90% of the potential companies that would otherwise absorb much of our time and resources.
Before we dig into our company specific analysis, we source and sort potential investments through several intuitive filters that also relate to people:
We monitor every purchase or sale of stock by insiders, every day. If we see management purchasing millions of dollars of their own stock in the public markets, it doesn't necessarily mean that it's a good investment, but it does mean that we should print out the proxy and annual report to determine if we too think it might be an attractive investment. We study total stock ownership by management, how that ownership was accumulated, and most critically, we seek to understand total stock ownership as it relates to compensation. Simply, we seek to invest with management teams that have more to gain or lose through their equity ownership than they do through their compensation.
Every quarter we monitor the publicly-filed holdings of a select group that we consider to be some of the world's top investors. Once again, the presence of successful investors or business people doesn't mean that we too should automatically invest in any given company, but it does make us want to investigate further, using our own investment criteria, to see if we can see what they do. If we find one idea per quarter in the two weeks of time that this takes, the process has paid for itself.
We seek out and talk to people that can offer unique perspectives on different industries. We speak with customers, competitors, and suppliers. We read industry periodicals and we constantly ask questions of Old West's valuable contact and client network from a collective 90+ years of business experience in order to provide prospective on how competitive landscapes are changing.
We look at "special situations" such as spinoffs and companies and/or industries that have undergone sharp corrections or prolonged downturns that mask underlying value, where we can understand why the company is structurally misunderstood and mis-priced. We also look for companies that have some sort of structural growth tailwind and asymmetric upside.