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Individual Investor
MCO Investments
MCO Investments
- Education Stanford University
- Qualifications MS, BS, BA
- Investment Experience 7 years
- Founded 2012
Margin of Safety
We believe that value matters. We do not believe in the efficient market. We invest in mispriced securities, profiting as value and price converge over time. Unlike most professionals, we are willing to endure periods of underperformance in order to achieve superior results over the long-term. In other words, we prefer a lumpy 14% return to a steady 10% return. However, we are very cognizant of downside risks, and we seek to avoid investments where there is a possibility of permanent loss. We will likely underperform when the market produces phenomenal returns, but we expect to outperform in other market environments.
We focus on businesses that we understand and that are trading at prices offering large margins of safety. We define margin of safety as the percentage difference between the price of something and our conservative estimate of its value. It is positive if the price is lower than our valuation and negative if price is higher. We estimate the margin of safety by determining the cash flows that will likely be delivered to the owners of an asset using conservative or even pessimistic assumptions and discounting their value back to the present (i.e. discounted cash flow model). If the value of a company under the worst case scenario is more than its current market price, then we can invest knowing we are unlikely to lose money even if we are wrong about the business. This margin of safety protects us: heads, we win; tails, we don’t lose much.
Markets are myopic and backward-looking, unable to focus on anything but the next quarter’s earnings. We therefore try to identify promising investments by investigating companies that investors appear to have become overly excited or pessimistic about. If such a company falls within our circle of competence, we conduct extensive research by consulting SEC filings, government statistics bureaus, trade organizations, and any other source that may be relevant. Our goal is to attempt to predict the company’s future path with a high degree of certainty. If we can’t understand the business, we don’t invest.
We run concentrated portfolios. We prefer to invest more money in our very best ideas than in our 50th or 100th best ideas. We therefore will typically have 5-15 positions at any one time. Weightings are proportionate to the expected profits of a successful outcome and the probability of achieving that outcome. Rebalancing occurs as we find investment ideas that we believe are better than those in our current portfolio. We are not afraid to hold cash: under certain conditions it can be one of our best ideas.
We sell when we find better investments. Even cash may be more attractive than a security that has appreciated substantially in value. We will also sell if we determine that we were wrong in our initial valuation of the company and that the margin of safety is not large enough. We will not sell simply because an investment has declined in price.
No exceptions.
Model commentary
We doubled our cash position for stock correction ahead
7 April 2013
We aim to keep our powder dry should stock market decline.
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