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 large margin of safety in terms of price paid relative to business value received. Buying at a large 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. Our perspective is that if we focus on the downside, the upside will take care of itself.
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:
First, we monitor every purchase or sale of stock by insiders, every day. If a CEO and several directors purchase 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 see if we can see what they do.
Second, every quarter, we will mine and reverse engineer the publicly-filed holdings of those that we consider to be 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.
Third, we seek out and talk to people - from CEOs to salespeople, both current and former - to better understand the dynamics in their particular industries. We also read industry periodicals and attend trade shows as a way to better understand potential investments.
Finally, we will look at "special situations," such as companies with complicated accounting that masks their underlying value, where we can understand why the company is structurally misunderstood and mis-priced.