"We believe that buying securities at large discounts to conservative [business] appraisals provides the best route to above-average compounding. We're focused on nailing down our evaluations so we can use them to make significant long-term investment commitments when sellers are under duress or traders are consumed with ephemeral short-term issues."
--Mason Hawkins, Founder, Southeastern Asset Management, 2010
John and Kevin with Mason Hawkins
We regard a stock as a fractional ownership interest in the underlying company. In order to make a rational purchase or sale of a stock, we think one must understand the value of what is being bought or sold. We refer to this economic worth as "intrinsic value", and it can be approximated through skillful analysis of company fundamentals. It should be thought of as the price that an informed buyer would pay for a company based on its future earnings power.
Because investing in stocks is an uncertain endeavor, one must be concerned with limiting risk. This is accomplished by adopting a conservative approach to business valuation, thinking carefully about what can go wrong with a company, and investing only when there is a margin of safety (that is, when market price is clearly lower than intrinsic value).
The rational stock investor realizes that progress in finance is cyclical, and that market and economic conditions will vary over time. It is understood that there will be periods of strong and weak economic growth, rising and falling markets, low and high interest rates, a strong and weak dollar, inflation and deflation, etc.
Although some of these periods will be painful and short-term portfolio declines will result, it is important for the investor to resist the crowd psychology and to avoid focusing too heavily on "the market". Instead, one must think like an owner, maintain a long-term, multi-year view and simply endure the pain until conditions improve. This is more easily accomplished when there is a focus on the business and a clear understanding of its value.
At Peregrine, we think what matters most in investing is the price that is paid in relation to value and then what the company will earn many years into the future. Our goal in owning stocks is to produce solid investment results over full market cycles. We see this as the equivalent to winning a marathon, not a series of sprints.
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