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Investment Methodology
Pastel & Associés' presentation
Since the company’s inception, the portfolios have been managed according to the same methodology built around some key principles:
- The need to rely on screening and analytical tools which are independent of the stock’s market influence.
- The determination, for each company in which we are likely to invest, of an intrinsic value, generally estimated according to its long term ability to generate Free Cash Flows.
- The requirement for every investment to incorporate a qualitative margin of safety: we generally favor companies with significant and sustainable competitive advantages and experienced managements, whose incentive packages are tied to long-term stock price performance. The business models must be relatively simple, resilient and time-tested.
- The requirement for every investment to incorporate a quantitative margin of safety: we generally favor companies with a track record of high rates of return, primarily on capital, equity, and revenue, over the past 5 to 7 years and whose stock we can purchase at or below their estimated intrinsic value.
- The objective of minimizing the risk of permanent loss of capital, through making investments primarily in companies which benefit from high levels of margins of safety, rather than trying to minimize and monitor the market value volatility of the portfolio.
- The focus on micro-economic analysis while taking into account the financial performance, over a complete economic cycle, of the companies we follow. Macro-economic expectations generally do not play any material role in our portfolio building and monitoring process
- The importance given to the notion of conflict of interest, specifically with respect to the relationships between minority and controlling stockholders, between management, employees and stockholders, etc.
- The preference for concentrated portfolios, built around a limited number of securities.