Learn from the best

There are many investors we agree with and try to copy outright. As many of our followers already know, Warren Buffett and Charlie Munger are the cornerstones of our investment philosophy. Other investors that we do follow as well are Mohnish Pabrai, Phil Town, and Li Lu to mention a few. You can find a list of more of them in our free eBook on our website, where you can also read about the method of coattailing that we use to try to get the same investment results as they do.

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One of the superinvestors we tend to agree with, but not always, is the investor Bill Ackman. In one of his interviews he goes through his strategy, how it works and what's his checklist. We do agree that his approach when finding an investment is a good one. But we do not try always to figure out what management can do to solve a problem, since we're not active owners.

Bill Ackman has the following to say about his investment approach

"We look for very high quality businesses. We describe them as simple, predictable, free cash flow generative, dominant businesses. A business that Warren Buffett would describe as having a moat around it. If you believe that the value of anything financial is the present value of the cash that you can take out of it over its life, we need to know how much cash it can generate over its life. So business quality to us is the single most important criteria for determining for what's interesting. Because if we can't predict the cash flows, we don't know what it's worth. So we figure out what it's worth. We figure out how good the business is. How predictable the cash flows will be from a railroad or a spirits company, or real estate company, shopping mall business, etc. And then we say, well where is it trading? Is there a wide gap between price and value? And you can buy $1,20 for 50 cents? And then we're going to take a hard look and try to understand why it trades at a deep discount."

If we think the management can solve the problems, or if it will take some time, then we'll be interested. But sometimes the market is just crazy too, and the price is low and it doesn't mean there's something wrong with the company.

What more would we add

Many investors think that there is a difference between value investing and growth investing. Here we agree with Charlie Munger in that growth is just a component of investing, and that all intelligent investing is value investing.

We certainly prefer to have growth. But growth is not always good. We look for a good business that earns high returns on capital and that can grow. If it's not a good business, we don't like it to grow. Imagine the construction entrepreneur who showed his friend his machine equipment and tools. "Here is all my profit, rusting away in the yard!" Some businesses require a lot of capital to grow, but that doesn't mean they are very good at generating cash.

One of our investments, Evolution AB that we have been blogging about, is one of these wonderful businesses in our eyes. It requires little capital, it grows a lot, and it has even a long runway ahead of it. Think about how much it might grow in the United States for example.

Where to invest during inflation?

We have the opinion that the place to be during high inflation is just the type of businesses that we have described now.

For example, Evolution is a type of business where the customers can play games and bet with the money they have available to set aside of gaming and gambling. The company doesn't have high capital costs along with growth of volume or sales. Imagine if there was 10% inflation and people would have more dollars from higher wages to play with. Evolution would still keep their cut, and dollar volume would probably grow.

On the other hand, the guy in the machine yard example would have a tough time if his new machines and equipment would get more expensive. When they rust away, they will be much more expensive to replace in a few years.