Philosophy

Concentrated Portfolio Approach

MCM typically buys a relatively small number (10–15) of businesses that enjoy strong competitive positions and are priced to produce an attractive expected return.

• By waiting patiently until a discounted price emerges, clients benefit not only from the growth in intrinsic value of the business but also as the market eventually recognizes the true underlying value.
• MCM’s process guards against the potential for permanent losses that usually result from a flaw in determining intrinsic value.

Rationality

MCM’s investment approach is straightforward and timeless with the focus squarely on fundamental business analysis. Intellectual honesty, rational thinking, and unbiased opinions combine to produce effective results.

• MCM’s investment process is more intellectual than mathematical.
• MCM’s methods are more qualitative than quantitative.
• “Too difficult to understand” businesses are excluded from consideration.
• Investment decisions and actions are explained to MCM clients.

Within the firm’s communications, Berkshire Hathaway’s Warren Buffett and Charlie Munger, and other like-minded buy-side investors, are commonly referenced. Knowledge and wisdom is developed from a voracious appetite of business and trade journal reading, decades of experience in synthesizing data and opinion, and a solid understanding of and respect for the teachings of history.

MCM’s Key Investment Principles

1. Focus on the Asset

As investors, MCM expects to profit from the growth in the underlying value in and/or the cash flows derived from high quality businesses. Conversely, speculators and traders attempt to profit from transitory changes in asset prices, relying more heavily on timing and emotion than on fundamental value.

2. Margin of Safety

Every investor understands the investment maxim “Buy Low and Sell High,” but to put that into practice, one must be able to determine some approximation of value. MCM insists that the ‘price-to-value’ relationship be favorable, generally defined as well below 1.0.

• MCM only buys when an adequate margin of safety is readily apparent, thereby limiting the risk of permanent capital loss. Read more on intrinsic value.

 

Intrinsic Value

 

MCM’s Risk/Return Paradigm

The graphic below encapsulates MCM’s perspective on how risk and return are related. MCM’s belief differs greatly from most who practice the investment trade. Modern portfolio theory (MPT) practitioners posit risk is a function of the volatility of the investment. MCM believes risk is a function of the price paid relative to the value received. In fact, the more volatile a stock’s price is, the greater the opportunity to buy lower or sell higher.

 

 

The key elements of the risk/return model as depicted theoretically below are:

1. The “intrinsic value” (red line) of a business must be upward sloping over time. Said another way, for MCM to have interest in a particular business, the fundamental value of that business must grow over time. If this is true, time is your friend.
2. MCM’s understanding of the business should produce a fairly tight intrinsic value approximation range (the shaded box around the intrinsic value line).
3. The market is rather efficient, represented by the stock price oscillating within the estimated range of intrinsic value most of the time.
4. Due to the manic/depressive nature of the stock market (the emotional element) the price of a business sometimes becomes considerably detached from its underlying value (points A & B). At these extreme points, the character of risk and return is noticeably asymmetric.
5. A purchase at point B affords the buyer a margin of safety in that the price paid reflects a discount to one’s assessment of value.

 

• MCM is constantly monitoring securities it would purchase, regardless of how attractive/unattractive the current price might be. Should the price of a business fall into the “attractively-priced” range, MCM can move very quickly in establishing a position. Read more about MCM’s Investment Process.

3. Concentration vs. Diversification

MCM limits its investments to a small number (typically 10–15) of great businesses in varied industries. The overall benefits of diversification are largely exhausted by the time a portfolio has accumulated 15 businesses.

• By concentrating, MCM analysts can commit extensive resources in “getting to know” the businesses very well.
  
• The better MCM understands the merits of a particular business, the lower the overall risk of making a poor investment decision.
  
• There is no inherent logic in diluting the performance of MCM’s best ideas by adding more and more names to a portfolio simply in the spirit of diversification.