During their recent interview with Tobias, Sean Stannard-Stockton and Todd Wenning of Ensemble Capital explain why investors should focus on idiosyncratic businesses to generate outsized returns. Here’s an excerpt from the interview:
Tobias Carlisle: Yeah, it’s a good place to be. I agree with you that you want to be away from the, you want to be away from Wall Street, you want to be away from all that as much as you possibly can. I love your strategy. It’s very traditional. What I regard is a very traditional modern buffet strategy long only concentrated high conviction, high quality. Do you want to just walk us through the strategy as it stands?
Sean Stannard-Stockton: Sure, so at the strategy level, we’re focusing on owning kind of 15 to 30 of the best businesses we can find that trade at a price that we think affords us market beating returns over the longer term, if we do our job right. And most importantly, the organizing principle of our strategy is not to be value investors or to be growth investors, but to invest in highly competitive advantage businesses.
Then once we find those, we think those businesses and really only those businesses are we well positioned to value better than the market. And so once we find them, we can establish an intrinsic value and at that point, understand what is a discounted price to pay. So a lot of people say well this growth stock that trades a 15 times earnings that’s good. We look at it and say what is going to allow this business to thrive for the long term. And that has to do with its competitive positioning in the industry.
Sean Stannard-Stockton: Todd has coined the phrase here, idiosyncratic businesses that maybe he wants to talk about now, because I think it really gets at the sorts of businesses that we look for, and why things like peer multiples and traditional market multiples is really irrelevant to the work that we do.
Todd Wenning: I mean, if you look at, a lot of times what happens is you have sell side analysts, and by side specialist covering an industry, and there’s benefits to having that depth of knowledge for the industry, no question about it. But what we find is that there’s opportunities a lot of times and companies that kind of straddle two different industries. Sometimes you have analysts covering the wrong, but they’re looking at through a different lens than we are. So one example would be Ferrari that might be a signed to an auto analyst.
But in reality, it’s both a luxury firm and an auto. And, for example, First Republic is a bank, which is pretty much a commodity industry, but they layer on high level of customer service, which makes them more akin to a customer service business. And so we find mismatches in valuations and outlooks in those opportunities. And we really love to find some of those businesses that don’t really fit in and have a lot of peer to peer competitors.
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