How would you characterize your investment philosophy and process?
At our core, we are long-term investors. The Discover Equity strategy is centered around the idea that small caps have the ability to change dramatically over a 2-4-year time horizon. And as students of business models, we look for companies that are entering into dynamic periods of their lifecycle where they are evolving into their longer-term potential. This positive change and dynamism often result in an acceleration in revenue growth, better margins, and return structure.
In regards to process, we have four key investment criteria that we consider for every potential holding and that we focus our research process through – transformational change/business quality; management, moat, and pricing power; thematic tailwinds; and valuation/ asymmetric risk-reward. I've been a small-cap specialist for most of my career. This has allowed me to develop both a portfolio construction method and a set of investment criteria that allows us to create a true, best-ideas portfolio of equities that we think can generate a minimum of 50% absolute return over two years.
We've developed a set of proprietary tools to help scour our investable universe of over 2000 companies in order to select what we believe are the most compelling 20-30 positions. I've invested in some extraordinary companies over my career, some of which we saw potential in early and grew into large-cap companies that dominate their respective markets. But that is only one aspect to our approach – we also own niche businesses with good pricing power and margin drivers as well.
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