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Field of Play

WORDS OF INVESTING WISDOM

Field of Play CIRCLE OF COMPETENCE

DOES SIZE MATTER?

Stepping outside your areas of competence is often a seductive siren song, but we’ve learned from experience not to listen anymore. Without the confidence that comes from experience and the ability to recognize patterns, the risk is higher that you’ll overpay or sell too soon in a panic. Shawn Kravetz, 12.30.05

Our strategy from the beginning has been to focus on areas where we believe we can have some advantage, where there is a greater prevalence of irrationality and higher likelihood of mispriced assets. For us, that’s not going to be investing in Microsoft or in some quantitative strategy against a room of Goldman Sachs’ Ph.D.’s with Cray supercomputers. We have to be guerrilla investors, lying in the weeds and picking off opportunities among the obscure and mundane. That usually means small, ignored companies that no one else is talking about. James Vanasek, 4.30.08

Over short periods of time, you can do the wrong thing and make a lot of money and do the right thing and look like an idiot. We try to stick to what we do well and not get too caught up in what's “working” at any given moment. In the long run, that sort of discipline will keep you from blowing up. Phillip Goldstein, 3.31.08

Most people say they want to stay within their circle of competence, and that’s smart. But there’s no reason to say “Here’s my circle of competence and, guess what, it’s never getting any bigger because I’m not going to learn anything new.” We’re trying to understand new things if we can. Bill Miller, 6.19.05

The article closes with a telling anecdote from a Wall Street banker recalling a dinner with Buffett in Manhattan: “He had an exceptional ham-and-cheese sandwich. A few days later, we were going out again and he said, ‘Let's go back to that restaurant.’ I said, ‘But we were just there’ and he said, ‘Precisely. Why take a risk with another place? We know exactly what we're going to get.’ And that is what Warren looks for in stocks too. He only invests in companies where the odds are great that they will not disappoint.” VII, 12.22.06 Winter 2008

The core of our experience and success has been in companies with market caps from between $200 million to around $2 billion. Small-cap investing can be more labor intensive due to the sheer number of companies, but at the same time you can more quickly know just about everything you need to know about a company to make an investment judgment. I can’t say that in looking at a company like AIG, for example. Philip Tasho, 9.28.07

Our strategy works best with smaller-cap stocks. Multiples tend to contract further when small companies mess up than when large ones do, so there’s more room on the upside when a small company grows out of a turnaround. I’d also argue that it’s generally quicker and easier for a small company to be turned around, which improves your chances of investment success. Kevin O’Boyle, 11.21.07

Our sweet spot tends to be in the $2-3 billion range, where the companies are www.valueinvestorinsight.com

clearly established but can still be under the radar. We also can get a lot more bang for the buck in companies that size from the initiatives we see adding value. In my experience, it’s harder for a $30 billion company to add $10 billion in value than it is for a $3 billion company to add $1 billion in value. We’ve bought bigger companies in the past, but I can’t say we’ve been very good at it. It’s just too hard to have an informational edge. Robert Lietzow, 2.29.08

We try to be cap-agnostic, but we do want businesses that are easier to understand, and smaller to mid-size companies are generally easier to understand. They have fewer divisions and we can usually get more of our questions answered. Steven Romick, 7.31.08

We want to maintain the discipline that we will invest in a company, regardless of size, if it meets our criteria. Part of that is because we learn from all the companies we own. Part of that is because it keeps us fresh and engaged and not stuck in the rut of looking at the same 100 companies everyone else is. We also take the position that a penny more in return for our shareholders than we would have had otherwise is a penny worth having. If smaller-cap companies can give us that, we’ll buy them. Clyde McGregor, 4.30.08 SECTOR INSIGHT

Our “trifecta” is to identify companies with increasing returns, growing cash flows and an ability to reinvest profitably, which is what we see in natural resources today. The phenomenon of 300 million people moving to the middle class in China is going to have a dramatic impact Value Investor Insight 5

Words of Investing Wisdom  

Greatest Hits” collection of investing insight from Value Investor Insight

Words of Investing Wisdom  

Greatest Hits” collection of investing insight from Value Investor Insight

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