Today we are celebrating ten years since our partnership launched.
During these ten years it feels the world has changed many times over. Similarly, our approach to investing has evolved considerably.
During most of our history (the first eight years or so), we held high the primacy of valuation in our analysis of investment opportunities. This is what I call “traditional” value investing: the first filter was, “Is this undervalued?” If an investment didn’t pass that test, it wasn’t worth evaluating further.
The problem with this approach became more evident as the years went on: in a fast-changing world where new business models are upending and disrupting incumbents, over indexing on valuation has the serious drawback of not putting sufficient emphasis on other important selection criteria.
Today, we take a vastly different approach which also includes valuation, but does so in the context of a much broader framework that places a strong emphasis on criteria that are ignored or undervalued in the traditional analysis: culture, management quality, research and development intensity, go to market strategy, where we are in the applicable technological adoption curve, and how the company’s competitive strengths are evolving, to name a few.
I call this our evolved brand of value investing.
Above all else, this evolved approach prizes flexibility. If the past eight months have taught us anything, it’s how volatile and unpredictable is our world. This is something everyone learns sooner or later; in 1930, 56-year-old Churchill wrote, “Scarcely anything material or established which I was brought up to believe was permanent or vital, has lasted. Everything I was sure or taught to be sure was impossible, has happened.”
Which is why today we keep top of mind the following adages:
“Strong opinions, loosely held.”
“In the beginner’s mind there are many possibilities, but in the expert’s there are few.”
“Any year that passes in which you don’t destroy one of your best-loved ideas is a wasted year.”
“It’s always Day One.”
“Perpetual beta.”
The unifying theme is that the world is complex, always changing, and unpredictable.
Our new approach is much more in tune with how the world actually works: businesses are like organisms in an ecosystem. They evolve and mutate (through internal investments in research and development, as well as through acquisitions), and the successful ones adapt to the always-changing landscape. They multiply in size, from single-celled bacterium to king of the jungle (one example is Apple, which was worth $70 billion just over 13 years ago and is now valued at over $2.2 trillion).
Our portfolio contains several such candidate organisms: businesses that are led by visionary, missionary founders who experiment, iterate, and adapt to a fast-changing world. We expect them to develop into the apex predators of their respective jungles.
This approach results in our having a long-term approach to investing. As long as our businesses are competitively advantaged and focused on delighting customers, we will remain owners for the duration of their development, which we hope is decades.
Successful businesses typically enjoy decades of sustained performance and this is what builds wealth: the compounding of culture, management knowledge, customer relationships, product development and ultimately, share price.
As with any endeavor involving constant learning, I am fully aware of how much more there is to learn. Entire industries and huge businesses will be built from scratch over the next couple of decades, without a doubt, and our goal is to have the mental flexibility, attention to detail and obsession with endless learning to capture those opportunities.
From my perspective, therefore, we are just getting started.
This journey would have been impossible without you, our extremely patient, thoughtful, and loyal investors, many of whom have been partners from the beginning. I believe our results over the next decade will be better, precisely because of our evolved approach, which itself is better adapted to the complex world in which we live.
Thank you for joining me in this journey!