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I look at companies through a very long-term lens. My favorite investments are the highest quality small-caps that I think can grow their value for the next several decades. In researching these companies, my focus is on how that industry may evolve over the next 5-10+ years and if the company's competitive advantage can expand within that evolution. When I'm thinking about the long-term future, one of the main things I worry about is new technology making a company obsolete. With technology advancing at such a rapid pace, a lot of perfectly good companies will be wiped out in the not-too-distant future. The goal here is to find compounders with durable business models that are still in the early innings of their lifecycle. Unless the facts change (and my thesis is proven wrong) or the founder dies or something like that, I view these holdings as almost permanent investments (whether that ends up being a holding period of 5-10 years or forever, I don't know).
While I would love to eventually have an entire portfolio of high quality companies that I can own for the very long-term, unfortunately I haven't yet been able to find ten of them that are undervalued and within my circle of understanding. Thus, the rest of the portfolio is filled with a handful of above average companies that are simply too cheap. This second bucket of investments is mostly very small companies that are overlooked by the market.
These companies share many of the traits of those compounders I seek out (aligned ownership is always a high priority, durable competitive position, more cash than debt, etc), but they are usually more mature and/or don't have the large tailwinds that allow for many years of above average growth. Because of this, I generally buy into these companies with the expectation of owning them for 1-3 years, but it depends more on how long the stock takes to reach my estimate of fair value.
Finally, I only look at companies where the CEO owns a lot of stock (preferably founders with their original equity). It is human nature to act in one's own interest. If a CEO owns a small amount of stock and is paid a bonus based on revenue growth, he or she is most likely going to grow the company at all costs. The majority of my net worth is invested in Wiedower Capital and I like to see a similar commitment from the management of this firm's holdings. Knowing management's incentives are aligned with my own helps me sleep at night.
Wiedower Capital aims to have around ten holdings at any one time. I prefer a concentrated portfolio for three main reasons. First, selectivity creates a high hurdle for portfolio inclusion. Second, being this concentrated gives me more time to research other potential investments. Finally, the benefits of diversification (decreased volatility) are subject to the laws of diminishing returns. An average portfolio of ten stocks has a standard deviation of around 24% vs an average portfolio of 1,000 stocks that has a standard deviation of 19.2%.1 Therefore, owning 30 or 100 stocks creates significantly more work, but only decreases the portfolio's standard deviation by a few percentage points. In my opinion, a small decrease in volatility is not worth the significant amount of increased work that comes with owning more stocks.
Small and micro-cap companies have been shown to outperform all other size companies over the stock market's history.2 Likewise, companies run by managers that have significant stock ownership outperform those with little or no ownership.3 Therefore, my investing universe (small companies run by managers that own a lot of stock) is likely to outperform the broad market just by itself. From there, my job is to find the best investments within that universe.
All client accounts (including my own) are invested in the same strategy. I am solely focused on maximizing the long-term returns of this one portfolio and that's it. Wiedower Capital is long only (no leverage or margin) and is mostly focused on US and Canadian companies.
To learn more about my investment philosophy, view my marketing materials below or visit my investing blog at traviswiedower.com.
