Process

Process Mechanics

MCM partners and research analysts form the investment management team. The firm’s three partners manage client relationships. Importantly, because MCM does its own research, clients can direct questions specifically to those people doing the work.

 

The investment team is agnostic with respect to market sectors and/or industries. As “generalists,” partners seek to find the very best investment options throughout the entire investment landscape.

  • Structure is intentionally designed into the investment process in order to combat natural biases and improve calibration.
  • A new (company) idea must pass a multi-staged approval process, including unanimous vote of the partners before it is added to MCM’s “inventory” of ideas.
  • The inventory is actively managed to allow the firm to quickly take advantage of pricing anomalies.

MCM’s Three-Stage Filter

For MCM to consider purchasing a company, it must pass through a three-stage filter process. The companies must:

  1. Have solid historical track records in generating high returns on invested capital over a long period of time.
  2. Have enduring competitive advantages and business model stability. Doing the same thing year after year means company knowledge is cumulative.
  3. Be managed by executives who think, act, and are compensated like owners.

Since 1987, MCM has successfully employed a Three-Stage Filtering process to assemble an inventory of potential investments. Intentionally designed to filter out uncertainty, the beauty of this approach lies in simplicity. By removing from consideration all businesses that don’t pass the three filters, MCM naturally optimizes research time by concentrating on only those businesses worthy of purchase.

Filter 1: Record of superior economic returns

The notion of economic profit is different from an accountant’s definition of profit in that the calculation of economic profit includes, as an expense, the (opportunity) cost associated with the capital employed by the business.

 

A company creates economic profit to the extent its returns on capital exceed its cost of capital employed. MCM favors companies with a long history of producing sizable (and growing) economic profit. This filter eliminates the great majority of investment candidates.

  • MCM conducts its own due diligence, spending hundreds of hours researching a company before a purchase is even considered.
  • Research is completed regardless of the relative attractiveness of the current price. MCM has followed some companies for years without ever owning a single share.

Filter 2: Sustainable competitive advantage and business model stability

Many insights are to be gleaned from the historical record. Exceptional historical performance, however, has predictive value only if the business model is inherently stable. The “moat” (e.g. unassailable brand, scale economies, established network, patent, etc.) that protects the business from relentless competitive assaults must remain stable (or even widen) in keeping competitors at bay.

 

MCM looks for companies that aren’t subject to rapid change and/or don’t participate in an industry with an uncertain competitive structure.


In assessing the merits of a potential investment, MCM:

  • Speaks to management, board members, competitors, vendors, and/or customers.
  • Thoroughly reviews the company’s financial and written history.
  • Creates financial models to estimate intrinsic value.

Filter 3: Capable, proven management

MCM looks for management teams that think and act like owners. Their singular motivation is to grow the per-share value of the business over the long-term. A great deal of information can be gleaned from a company’s proxy statement.

  • MCM prefers management that is at the behest of an independent, well-rounded board of directors.
  • MCM favors management compensation systems that align with longer-term shareholder interests.

Learn how MCM guards against the tendency to be overconfident

   View MCM Overconfidence Bias

 

Buy Decisions

 

MCM will consider initiating a position when:

  • The price paid implies an expected return double in value over a 5-year period.
  • There exists a sizeable margin of safety in the purchase price.
  • The partners are in full agreement with decisions to proceed.

Sell Decisions

 

MCM will sell a position when:

  • MCM's assesment of the business has deteriorated for any number of reasons, both endogenous and exogenous;
  • The market price of a holding appreciates much faster than does its intrinsic value; resulting in a single-digit, forward looking, expected return; or
  • A better investment opportunity presents itself.
  
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