The Valuation Process – The Core of the Investment Process
I’ve spent about forty years learning about investing. It’s been a labor of love. Today, it’s my practice. I manage a ~$150M+ hybrid portfolio of public and private/alternative assets as a kind of multi-family office. The path has taken untold turns and so the fabric of my investment strategy is a kaleidoscope formed by the different roads taken and not taken, the successes and, most of all, the mistakes made.
My investing career dates back even into the 1960s with the interest encouraged by my father who was a finance wizard. He invested on his own behalf and I can recall reading newsletters from the likes of Louis Rukeyser and John Dessauer in those years. I don’t know many kids whose dads talked about short-selling at the dinner table.
I launched my own efforts in a world without the internet. If you wanted to learn about businesses you had to read Investor’s Business Daily, subscribe to newsletters and sit for hours in the carrels of the library reading Value Line. It was only in the late 1980s that I found the gem that was the Bloomberg terminal which at that time was an ugly, grey standalone inscrutable box.
I followed a maze. You name it, I studied it. Growth, value, technical analysis, charting. I studied the coursework of the CAIA and the CFA. I looked for (and stole) ideas from anyone I thought would have a better mousetrap. The late 90s brought the world of options. If you participated in this, you know that the heady time of 1999 offered option premiums nothing short of jaw-dropping. The only thing more jaw-dropping was the speed in which wealth evaporated when the bubble burst. We learn the most from pain. My interest in learning about valuation took me to the halls of Wharton, to Northwestern University. I sat for Professor Damodaran’s valuation class at NYC not once but twice. Maybe your process travelled a similarly winding road?
In the entire investment strategy and decision process, the actual determination of a supportable valuation continued to appear to be an impossible goal. That is until Framework. I had the opportunity to meet and connect with Erik Kobayashi-Solomon at Morningstar and then following his exit from Morningstar hired him to teach me about valuation. After all these years of work, the valuation and investment decision-making fog started to clear. Framework’s methodology is simple and elegant. Not easy.
As a process-oriented individual, the Framework process made sense for me and there is no turning back. It is simply intuitive that if you take enough time to understand how this company makes money (selling one unit at a time to customers at some price) and you understand what that market environment looks like you start to have some rational hypothesis on which to build your valuation. It naturally leads that this company is either going to build its business by investing wisely or its not. The best determination of how successful it will be in the future is in looking at how successful it has been in the past. All companies have a life. Where is this company in that life span? The funnel through which Framework puts your thinking is simply thoughtful, logical and comforting.
Each of the holdings in our portfolio starts by being put through our investment strategy hurdles. Then once they pass the initial gates, the Framework Investing valuation process takes over. I am excited enough about what I’ve learned to want to share what I am doing with it – managing a going portfolio of client and personal money. I look forward to sharing our investment strategy and idea watchlists with all of you in future posts.