It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Warren Buffett
Investing in equities is inherently risky. Any business that you may be considering as a potential investment has numerous moving parts that can positively and negatively affect the future of that business and your investment returns. At Altron Capital Management we tend to focus on quality businesses with defensible moats as a way to help manage these risks.
Here are just a few of the qualities we look for in our investments:
Businesses we can understand
- There are tens of thousands of publicly traded companies across the world. Some are so complex that an analyst can spend years researching the business and never feel like she has a thorough understanding of all facets of that company. Instead of trying to decipher complex accounting practices, we choose to focus on businesses that are simple and easy to understand. If we can’t summarize the business in a few succinct sentences, we believe that we would be taking on far too much risk to consistently generate adequate returns.
Defensible moat
- In short, we like businesses with a strong competitive advantage. Competitive advantage can arise from a number of sources including branding, network effects, control of distribution, and regulation just to name a few. We find that companies without a durable moat struggle to maintain high profitability and high returns on capital due to intense competition.
Conservative balance sheet
- Companies with conservative balance sheets are more likely to survive the ups and downs of the economic cycle than their more debt-laden competitors. We don’t know when the next downturn in any industry will arrive or how long it will last, but investing in companies with the strength of survive even the toughest of times reduces the likelihood of permanent capital loss over the long-term.
Excellent and incentivized management teams
- A great company may not always make a great investment if management is constantly taking actions that are not shareholder friendly. We like companies where management has a long track record of proven success and where executive compensation is tied to long-term stock performance. Management teams that own a significant amount of shares can often earn several times their base salary if a company’s shares perform well, making it more likely that they will act in a way that creates long-term shareholder value rather than aiming to increase their next quarter’s paycheck. When management interest is adequately aligned with shareholders, we are more comfortable with the viability of our investment.
While these are just a few of the many qualities that we look for in a business, the above list encapsulates some of the traits we deem the most important. We believe that there are a lot fewer things that can go wrong when investing in a wonderful business than when investing in a fair one.
