The concepts and investment philosophy used by the principals of GoodHaven in managing your money are relatively simple to explain but much harder to execute. First and foremost, we try to behave in a business-like fashion and analyze securities from a business owner or lender point of view. This means always trying to determine a range of “intrinsic values” for the securities we identify as candidates for purchase.
As Ben Graham (left), the “dean” of security analysis and one of Warren Buffett’s professors at Columbia University in New York once wrote, “Investment is most intelligent when it is most business-like.” We try to embed Graham’s concepts of intrinsic value and “margin of safety” into everything we do for our clients and shareholders.
We define intrinsic value is defined as the price that a security-holder would receive if a company were sold to a knowledgeable buyer or the proceeds that would be received upon liquidation or reorganization of the enterprise.
We define margin of safety is defined as the discount from intrinsic value at which a security may be purchased.
Value investing becomes a process whereby the portfolio manager is constantly trying to identify intrinsic values and maximize the associated margin of safety. We think of these concepts as trying to find dollar bills in the stock or bond markets and then buy them for less than a dollar – preferably far less. In any investment, a larger margin of safety implies a lower chance of significant loss and a greater potential profit.
Unlike many investors, GoodHaven cannot be put in a simple style box. We prefer companies that grow, but will sometimes buy one whose revenues are shrinking. We prefer to invest in common stocks, but will sometimes venture into other security types. And we prefer easily understandable businesses but sometimes buy those with more complicated financial statements. However the common theme in all our investments is that we are constantly trying to get much more than we give.
Hint: if you’re looking for a bargain, you want to spend your time looking where there is fear or disinterest, not where popularity or momentum rules supreme.
We are not stock market strategists, technical analysts, or fortune tellers. That does not mean we are immunized from considerations of external economic factors or volatility in markets or individual securities. But our primary concern with these issues is about the risks they present, not their predictive power.
We don’t mind volatility, but detest large risk, which we define as the chance that we can permanently lose money. In our decades of experience, we have found almost nobody with an ability to predict the course of markets with short-term success over a long period of time. Our experience suggests that time is better spent trying to position ourselves to react to events instead of trying to predict them. Accordingly, we may have a significant cash or equivalent position when valuations seem stretched and are likely to employ those reserves during times of significant stress in markets or individual securities.
Lastly, we believe that wide diversification is a hedge against ignorance. We manage accounts with prudent concentration, believing that it is better to own fewer securities about which your knowledge is substantial than a much longer list where your knowledge is cursory. Although it should be obvious to most investors, if you want to outperform an index over time, your portfolio can’t resemble the index.
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GoodHaven Capital Management, LLC is a registered investment adviser established in 2010. No information contained herein is intended to provide, and shall not be relied upon as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security, or fund. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, goals, assumptions or future events or performance are not statements of historical fact and may be "forward looking statements." Forward looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Forward looking statements in this action may be identified through the use of words such as "expects", "will", "anticipates", "estimates", "believes", or statements indicating certain actions "may", "could", or "might" occur. Any non-factual statements, including those regarding possible future events, constitute views and/or present intentions and are not representations or warranties and are subject to change. Past performance is no guarantee of future results and all investing involves risk.