What makes us not just different, but better?
We are long term
investors, not Speculators.
A good place to start would be to explain what we are not. We are not passive investors who believe in Efficient market hypothesis. We don’t believe that investments can be done based on numbers alone, even with complex algorithms. This has little to do with allocating capital to innovative companies, which is the domain of active fund managers.
But neither are we like typical active fund managers. This term ‘Active’ has come to suggest pure activity by fund managers and their endeavour to be simply different from an index fund. Much of this ‘activity’ has to do with catching on to trends in the market, which change
with the season. Which is why the failure of active management has led to the growth of passive management.
For us, investing means focusing on what really matters. In this age of round the clock news, where there is constant noise and complexity, it requires resolve to think independently and maintain a long term perspective. We willingly embrace uncertainty and the fact that we may be wrong. Investments are not about supercomputers, speed and abundance of data. Its about imagination and artistry and working constructively with inspiring companies who have greater ideas than our own.
Investing is an art,
not a science
A lot of Investing is presumed to be about data. Cold facts and figures. More on what has already happened, rather than future potential. There might be people who are clever enough to consistently predict fleeting share price fluctuations and second guess the market, but its not a skill we have. We have no idea what the markets are going to do three, six, twelve months from now. We also don’t have strong views on day to day performance of the share price of a company. In a market dominated by short term speculators, prices are set by investors trying to anticipate what each will do next. In the short run, the value of a listed company may have no relationship with the state of the business it represents. Progress or problems justifying significant share price changes are drowned in the noise. Lot of data analysts then connect historical share price movement as being the ‘risk’ inherent in the business, which makes absolutely no sense. We believe that investment is more art than science.
Its creativity lies in anticipating changes at an industry, company and societal level. Trying to understand how people adopt new behavioural changes. Also, to understand what could go right as much as what could go wrong. Looking at data and making decisions on the future prospects of a company would seem a very rational thing to do. But, it’s the softer and more complex nuance of societal level behavioural change that drives tremendous returns in the portfolio.
Understanding the intrinsic qualities of a business and the world in which they compete make it easier to make predictions over a few years than a few quarters. We consider factors like size of opportunity, adaptability, quality and commitment of the management and whether the firm has built/is building a sustainable competitive advantage.
Art is first and science is a distant second, when it comes to investing.
We build relationships,
not just portfolios
The real investing on the ground is done by the mangers of the companies themselves. They spot an opportunity and decide how to exploit those and make the day to day decisions that determine success or failure. Its their reactions to changing circumstances, their knowledge, inspiration and perspectives that make a difference. Much depends on what culture they create within the company.
Our job as investors is not just to invest in companies from a distance but to learn and support the companies we back. With the experience and perspective that we’ve acquired, we help and encourage managements to take long term oriented decisions. When you’re judged on a quarterly basis, this is always a conflict. To discover if a firm can thrive in the long term and generate desired multiples of our initial investment, its important to understand
the managements motivation. We need to buy into their capital investment strategy, even if it depresses short term profitability.
We converse with companies not to know more about their business than they do, let alone telling them what should be done. The closer the relationship to the management, the better we can understand if they are focused on creating long term value, and we can then invest more confidently. Of course, this doesn’t mean we can’t sell an investment. This may be due to a disagreement in management strategy or any external outlier event. Our relationships are built on openness, transparency and understanding. Connections built on these foundations are ones that last longest.
Focused on the
big picture
Busy-ness is a badge of professional excellence, reflecting superior sources of company information, familiarity with market cycles and whiplash commercial reflexes. But this is based on a misunderstanding of how an investment manager adds value: not by trading stock markets but by seeking companies that can outperform their peers over the long term. Frantic day-to-day activity is distracting and unrewarding. The first task is to understand the dynamic environment in which those big strategic calls are made. Then we assess whether a company has what it takes to realise its vision. It’s that big picture, not current financial performance or quarter-to-quarter market movements, that matters most at Living Root Capital. It helps us to imagine what kinds of businesses will benefit from the disruptive changes we see coming, and which will be sidelined and superseded.
With disruption at its current scale, traditional, quantitative investment research has little chance of telling us what we need to know about a company’s fortunes five or ten years in the future. Of course, we must be satisfied that a firm’s figures add up and that its operations and approach to business are robust. But we focus on the scale of the market opportunity, the ambition and adaptability of management, the potential of its entrepreneurial leadership and intellectual property, and on the new customers
it might create. We don’t fixate on today’s market share or the minutiae of quarterly figures.
No spreadsheet column will tell you about the importance people place on the threat of global warming, but it matters that consumers are choosing Not to buy products and services from companies they consider irresponsible. So, for investors, the starting point might be: Is this company doing enough to mitigate climate change and greenhouse gas emissions? Is it achieving something worthwhile? Is it benefiting from behavioural change? If the answers to those questions is yes, then there’s a better than average chance of long-term success and we will then look in detail. And to be clear, sometimes that detail does matter – but it’s not our starting point.
The big picture often emerges from asking what a company is making possible that didn’t used to be possible. For investors, it’s about finding companies where profits just might compound at significant rates, year after year after year.
Looking at the big picture means we may only be roughly right, but we’d rather have that than be precisely wrong. Because anticipating big change over 10 years is always going to be worth more than being slightly more accurate than fellow investors in forecasting next year’s profits.
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