Research, Discipline, Patience
Midway capital does all its own research and adheres to a strict investing philosophy. This focuses on buying securities for less then a conservative estimate of their intrinsic value and holding them for the long-term. We do not invest borrowed money or short securities. If there are no securities that meet our stringent criteria, we will hold cash. We believe that good research must be founded on a sound methodology, and that having the discipline to execute that methodology will result in superior investment results for our clients.
We think that a coherent and consistent philosophical approach to investing is necessary to protect and earn reasonable returns on capital. The bedrock of our approach is that Midway does not distinguish between analyzing a business and analyzing a stock. The two are linked because the value of stock is simply the value of the business divided by the number of outstanding shares.
In The Intelligent Investor, Ben Graham remarked that investing will be successful to the extent it is business-like. If we were to name our philosophical approach we'd probably choose business-like investing. That is, we look at a stock as a legal interest in the net assets of a company. We think of ourselves as part owners of a business. The entirety of Midway's research process flows from this seemingly simple starting point.
Our goal is simple: Buy a stock for less than it is worth.
To achieve this goal we look for businesses with good profit margins and returns on capital, sensible managers and a market price that offers a good chance of a better than average return.
We cannot time the market. We will probably never buy at the bottom or sell at the top. Rather than concern ourselves with attempting to buy at the lowest price and sell at the highest price we focus on obtaining the highest quality businesses at reasonable prices.
We will avoid things we do not understand but will always try to expand our knowledge base. It isn't difficult to understand the recent past and know how most businesses currently function. It's much more difficult to know what returns a business will produce a decade from now. Because we consider ourselves owners of a business we will focus on businesses that we think we can forecast with reasonable confidence ten years in the future.
The market system doesn't create success. It weeds out failure. We think this aspect of a free market system is underappreciated, but it's vital to avoiding poor investments. We study failure as much as we study success and seek to identify the root cause of failed businesses and poor investment performance. We attempt to avoid the mistakes illustrated in past failures.
Investing isn't like gymnastics or diving, there are no extra points for difficulty.
Even though we think of stocks as small pieces of a business and we view a business from the point of view of an owner there is one important difference between and actual owner and the owner of a share. We cannot control capital allocation decisions including, special dividends, share repurchase, acquisitions and divestures. For this reason we think it is best to invest with proven management teams that also own a good amount of company stock.
How do we know Midway is really a "value" style manager?
In our view, value investing is nothing more than buying a security for less than it is worth. The distinguishing trait of our investing style is that we are not willing to pay up for a security and will sell if we think it is too pricey even if we like the business and the managers.
Even a fantastic business can prove a poor investment if the price paid is too high. And a bad business could prove a fantastic investment if the purchase price is low enough. There are no hard and fast rules to use as a guide. In general we compare the quality and prices of various business that we think we understand hoping to maximize the quality of business and bargain prices.
The easiest comparison available to us is government bonds. In our opinion, a security can be determined a bargain to the extent that it can produce a return larger than the yield on government bonds. The larger the spread, the more interested we will be.