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Investment Philosophy

“Those who have knowledge don’t predict. Those who predict don’t have knowledge”.
– Lao Tzu, a 6th century BC poet

The Managers at SLCM share the wisdom in the above quote and apply this message to the center of their investment process. However, despite these age-old words of wisdom, our financial industry seems to eternally persist in basing their investment process around forecasts. This is all the more puzzling given the ever growing evidence on the appalling track records in forecasting. As both James Montier (Global Strategist, Société Générale) and Nassim Nicholas Taleb (Professor of Risk Engineering, New York University Polytechnic Institute) have so often argued, economists, strategists and analysts are all guilty of vastly inaccurate forecasts of the future. In fact, their estimates merely seem to be a lagged function of actual outcomes as adaptive expectations dominate forecasts.

Rather than spending countless hours forecasting company’s earnings per share in the next quarter to the nth decimal place, the Managers at SLCM spend their time analyzing macro or thematic trends that will generally take much longer to form and play out. As the Managers believe they have no clear edge in forecasting short term, they favor placing bets on themes and trends that have a better reward to risk ratio. This isn’t to say that the Managers take the concept of equity valuation lightly. On the contrary, intrinsic valuation approaches are a cornerstone in our investment process. To this end, we use a myriad of valuation approaches in order to pick the securities we identify as having the largest margin of safety in their current valuation.

As a consequence of our investment approach, we will not bet on things we don’t have a strong view on. Rather, we will target specific subsections of the market, where we will bet big on things we feel the probabilities favor our well grounded conviction. As we are not forced to beat an index or own securities where we don’t feel we can add a great deal of value, our clients get exposure to only what we consider to be the most profitable investment themes and where we feel we have strong non-consensus views. In such a way, we will build thematic focused portfolios. In essence, our bottom-up portfolio construction will complement our top down market views.

We will back our judgment on the macro themes we selected and build dedicated long-term portfolios around it. We will favor patience and thoughtful reexamination of our positions and views over quick decision-making which we feel is more often than not driven by emotions. We feel this to be the rational way to invest as we strongly believe that company fundamentals don’t tend to change to any significant measure over short time horizons. As a consequence, we will trade infrequently and wait for our convictions to play out rather than chase the latest momentum fads or look to make a quick return on a ‘sure’ sell-side tip-off. As long as our central conviction remains intact we will wait. This patient approach also reflects the liquidity constraint within the SLIF’s investment universe (e.g.: small to mid cap resource based securities that are often operating in emerging markets and have low analyst coverage), which also favors our long-term investment approach.

NB: a more detailed description of our investment philosophy and investment process (including our approach to valuation) is available upon request.