risk-adjusted returns, net of all fees, over the long-term.
We strive to do this by exploiting the inefficiencies of an 'efficient market.' We have been reaching our goal for over three decades by finding publicly traded companies trading for less than their intrinsic value.
Since our contrarian style means we tend to invest opposite from the market, attracting the right clients is of paramount importance. We have grown our assets at a measured pace because we believe having clients with a temperament consistent with our own is necessary for us to apply our investment approach effectively. Additionally, it enables us to focus on smaller, under-followed companies where market inefficiencies are more likely to appear and ensures that we are able to invest the same way we have for over three decades.
Price vs Value
The most important principle, which lies at the foundation of our investment philosophy, is that the market price of a security does not necessarily indicate the true economic worth of that security. In other words, the price that you pay for a security and the value of that security are not one and the same.
Classic value investors
Our mission is to generate long-term returns that outperform the market net of all fees by identifying and investing in securities where the asymmetry between market price and our estimate of true economic value, or intrinsic value, provides the opportunity for substantial capital appreciation while maintaining a significant "margin of safety."
Research Driven Culture
Our analysts generate ideas from a wide range of sources including screening, reading widely, attending conferences and leveraging a network of like-minded investors. Because our firm has had a consistent investment philosophy for over 30 years, we have a firm wide cumulative knowledge that we can leverage to our clients’ benefit. This includes our database of research on companies that we ultimately did not invest in, our network of managers, and our deep understanding of the industry our companies operate in. While our investment professionals are generalists each has developed particular circles of competence that we can leverage across a wide range of industries and situations.
Business Owner Orientation
A stock is not a piece of paper that one buys and sells in the hopes of making a buck. A stock represents a fractional ownership of a real business. When we purchase shares of a company's stock, we literally become owners of a fractional share of that entire business. Within that framework, our analysis is fervently focused on understanding the underlying economics and practical operations of that business in the same way a business owner would.
A behavioral advantage is developed by overcoming emotions and reacting calmly and rationally to new information and price changes. At its core it involves going against convention and human nature. Our behavioral edge comes from our ability to tolerate market volatility. At Robotti & Company Advisors', our primary and most important edge is behavioral. We achieve either an informational and/or an analytical edge for each of our investment companies, but this is possible only because of the foundation of our behavioral advantage which frames the information we seek to uncover and the analyses we perform.
Part of our behavioral advantage stems from our long-term orientation. A small business owner does not check the value of their company on a daily basis, nor does a homeowner check the daily price fluctuation of their home. Much the same, we only pay attention to daily price fluctuations for the opportunity they might provide and we frame our analysis of quarterly results within the context of how will it affect the normalized earning power of the business over the next 3 to 5 years. An additional benefit of investing for the long-term is that we get to know management teams very well over the course of our investment. In certain situations we will even join boards of the companies we are invested in.
Another source of behavioral advantage is our contrarian nature. We sift through companies that are facing significant near-term headwinds and 'unknowns'. Through our independent research we seek to identify those companies where the issues are not only temporary but once cleared will have the dynamics in place to take advantage of a long runway of growth. We avoid the herd mentality because we recognize that the market participants are human beings driven by emotion, and we do our best to manage those emotions when we invest. By being aware of behavioral biases, we are better able to avoid pitfalls that the herd will miss.
Everything comes down to valuation. Each step of our research process goes back to understanding the true economic worth of a security so that we can compare it to the market price with the ultimate goal of understanding the normalized free cash flow prospects of a business. At the end of the day good things happen to cheap stocks.
Alignment of interests
We want the companies we invest in to have skin in the game, so we look for those that have good insider ownership. Similarly, we want our interests to align with our partners. We invest alongside our partners which means when we win, so do our partners, and of equal importance if our partners lose, so do we. This orientation of incentives makes sure that we eat our own cooking.
Risk Control - Margin of Safety.
Insisting upon a margin of safety helps us guard ourselves from ourselves. As a result, we only invest when the discrepancy between price and value is sufficient to allow for unpredictable economic events, market volatility or errors in our analysis. If you come to a bridge that holds a maximum weight of 10,000 pounds would you feel safe crossing it in a truck that weighs 9,800 pounds? We are looking to drive the 5,500 pound truck so even if we miscalculated by 1,000 pounds we won't find ourselves plunging into the ravine. The conventional definition of investment risk is volatility. We disagree and, in fact, one source of our competitive advantage is our ability to tolerate market volatility and focus our efforts on understanding the long-term normalized earning power of a business well before the “investing herd” gains interest. We think about risk as a function of two factors: (1) how much can we lose and (2) what is the probability of that loss. The natural result is that in aggregate, we end up limiting the amount of money we will lose in a worst yet realistic scenario.
Culture / Temperament
Bob Robotti has spent over 30 years building an entrepreneurial culture that has attracted independent thinking analysts who are passionate about value investing. The most important trait we look for in our research analysts is passion. This drive to follow the research threads wherever they may lead creates an environment where analysts can filter out short-term noise and intensely focus on the identifying and understand the few key factors that determine the outcome of an investment. Behavioral biases are a part of human nature we will never completely overcome them. At Robotti, we believe by continuing to question where our biases lay, we are more likely to be able to mitigate the pitfalls they can cause. Additionally, by being mindful of these biases, we can find opportunities when they manifest themselves in the market.
Decades of Experience
Navigating every market cycle of the last 35 years using our consistent investment approach provides us with an extensive knowledge base to capitalize on the various cycles of the future.