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 from eventual market recognition of the true underlying value - normally resulting in an increase in market price.
- MCM's process carefully scrutinizes each business, weighing opportunity against the potential of permanent loss that could result from misjudgments in determining intrinsic value.
MCMs 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 qualitative as well as quantitative.
- "Too difficult to understand" businesses are excluded from consideration.
- Investment decisions and actions are explained to MCM clients.
Great thinkers and investors of the ages are commonly referenced in MCM communications. From present-day icons like Warren Buffett and Charlie Munger, to FA Hayek, Adam Smith, Charles MacKay, Gustav LeBon, Ralph Waldo Emerson, and Sir Isaac Newton, knowledge and wisdom grow from understanding the lessons of experience and history. Members of the MCM Investment Team enthusiastically embrace the essential duties of staying informed, synthesizing data and opinion, and applying knowledge in a fiercely independent manner with clients' best interests always foremost in mind.
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. That is one of the primary responsibilities of the MCM investment team. Once the intrinsic value of a company has been determined, MCM insists that the asking stock price be favorable, generally less than the determined value of the business.
- MCM buys only when an adequate margin of safety is apparent, thereby limiting the risk of permanent capital loss.
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:
- 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.
- MCM's understanding of the business should produce a fairly tight intrinsic value approximation range (the shaded box around the intrinsic value line).
- The market is rather efficient, represented by the stock price oscillating within the estimated range of intrinsic value most of the time.
- 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.
- 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 an attractive 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.