Philosophy
At ValueWorks we define value investing as buying the best-quality assets at the best possible prices. We like to think of ourselves as bargain hunters: it is our goal to pay only $0.50 to $0.75 for $1.00 worth of assets. We evaluate the component parts of a company, assigning each of its assets a dollar value that, when added together, comprises the underlying value of the company; if this is higher than the company’s stock price, we consider it an investment opportunity.
These principles are straightforward, but converting them into practice requires a sophisticated and consistent process. It entails extensive independent research, a high level of expertise—in appraising both assets and claims—and the discipline not to be led by emotions when market conditions are volatile.
Risk
Risk is best controlled in our process through knowledgeable security selection, reasonable diversification and steadfast discipline. Careful and diligent security selection can lower the chances that we simply make a mistake and mis-appraise the assets or liabilities; and it can limit the likelihood that something changes in a unexpected way to fundamentally alter the math. Diversification can limit the impact of a single mistake; it can also limit the impact of a company, sector or group going more out of favor and trading at a larger discount to the underlying value.
In periods where investor enthusiasm or despair drive overall valuation to particularly large premiums or discounts to underlying value, ValueWorks has found the best risk control to be discipline. Our experience has been that those larger disconnects, whether in a sector or the overall market, run their course remarkably quickly; often during these events the emotional temptation is to move in a certain direction and it is discipline that keeps the portfolio on track for long term results.