Over the course of his career, Founder Derek Pilecki developed an investment philosophy influenced by his service as co-Chair of the Investment Committee at Goldman Sach’s Growth Equity Team, as well as an in-depth study of Warren Buffett’s investing career.
Buy the underlying business – Gator approaches a stock purchase as if we’re buying the underlying business of the company. As investors, not speculators, we view stocks as businesses. We want to benefit from the cash it distributes and its ultimate value. Conversely, if we were speculators, we would view stocks as scraps of paper to be traded.
Focus on high quality businesses – Gator focuses on high quality businesses. We look for a strong competitive position in its market, attractive economics, such as high margins and high returns on equity, a strong balance sheet and a management team that thinks and performs like owners. High quality businesses are attractive because their intrinsic value tends to grow with low volatility through time, and they’re not dependent on the capital markets to fund their businesses.
Buy businesses we understand – Gator focuses on businesses we understand. Warren Buffett calls this his “circle of competence.” Our portfolio tends to favor companies in consumer, energy, financial and service industries — areas we understand thoroughly. Because we don’t possess scientific expertise, we shy away from companies that make a heavy investment in research and development. As we gain experience or bring Analysts on board in these areas, this may change. Currently, we limit ourselves to reduce risk.
Focus on growing businesses – Gator focuses on growing businesses for several reasons: Growing businesses have more strategic options; the market places a high discount rate on expected growth beyond the next calendar year, and the after-tax return potential of a growth stock is higher because you can hold a growth stock for multiple years, resulting in a low turnover strategy and lower taxes.
However, the risk with growing businesses is other investors love growth as well and can drive valuations too high.
Buy with a margin of safety – The intrinsic value of the business is the sum of all its future cash flows. Ultimately, stock prices converge to the intrinsic value of the business. Gator considers most stocks are either fairly priced or slightly overvalued compared to their intrinsic value. Recognizing our assessment of intrinsic value could be incorrect or may decline, we buy stocks with a “margin of safety” or at a “discount to intrinsic value” to protect ourselves.
Opportunity in small cap stocks – We find our best ideas in small cap stocks because they suffer from a lack of research coverage by Wall Street, and a lack of liquidity, keeping some large investors away. We believe we can continue to find many high quality businesses at attractive valuations in the small cap area.
Opportunity in corporate events – Gator sees regular opportunities in stocks related to corporate events such as spin-offs, initial public offerings, bankruptcy exits, rights offerings and buyback programs. We believe these opportunities exist because institutional factors cause large investors to either be forced sellers of or ignore these opportunities.
Concentrate holdings into best ideas – Gator runs concentrated portfolios to focus our clients’ capital on our best ideas. A portfolio approaching a 100-plus holdings loses the benefit of active management.
Maintain a strong sell discipline – Often, the market adjusts to changes in a company’s business before we do. When stocks experience negative moves, it is often better to exit the position and reassess our investment thesis.
Taxes matter – For most investors, taxes are more important than returns. Gator tries to let our gains compound over a period of years; we’d rather pay taxes on gains than let our excess gains evaporate due to poor performance.
Want to see the thought process behind one of Gator’s recent stock purchases?
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