My strategy

In short, I try to find well-run small-cap companies and invest when I think there's a discount to what the business is worth. Perhaps the most important part of my strategy is about which companies I don't invest in. To find good investments, I screen out any company that loses money, shrinks its revenues, has highly variable earnings, carries significant debt, is entirely dependent on external factors (like commodity prices), or fails to convert profits into cash flow. Run that filter and you should be left with companies that are profitable, growing, financially sound, and generating stable cash flows. A pretty good starting point, in my view.

Companies

To assess the quality of a business I look at the financial track record. Good companies tend to show growing revenues and earnings over time alongside manageable leverage. Beyond that, I prefer companies with a strong market position and good opportunities to reinvest in the business — so they can keep compounding earnings power and continue deploying capital at attractive returns going forward.

Valuation

Arriving at a fair value requires making assumptions about the future and deciding what multiple the business deserves. I typically build estimates for revenues and margins two years out, which ultimately boils down to an expected earnings per share figure. The fair value is heavily anchored in historical performance, but naturally also reflects the outlook for the business going forward.

Buying

Once I have a fair value, I want at least a 20% discount to it before buying. That margin of safety protects me against forecasting errors, but it also means there should be room for re-rating if my assumptions turn out to be right.

Selling

I sell if a position reaches fair value, or if it becomes clear my original thesis was wrong. Sometimes a more attractive opportunity comes along, which can lead me to sell even if I still think the stock looks cheap.

Portfolio construction

I cap individual positions at 15% of the portfolio and individual sectors at 30%. The idea is simple: no matter how convinced I am, there's always a real risk that a company isn't as good as I think, or that my analysis is just wrong. And when that happens — not if — it shouldn't be able to do serious damage to the portfolio.