At First Floor, we have numerous investment philosophies and beliefs. The following four are in some sense our most fundamental.
It’s more than a return.
We believe that the quality of an investment decision cannot be determined simply by its return. It’s easy to achieve above average returns during good times by taking on more risk and most times are good times. As such, most period reward excess risk and comparatively punish prudent caution. Only in a few, rare periods do the disastrous effects of excessive risk come to pass. Our goal is to deliver adequate returns in good times while keeping risk under control to prevent losses when the tide inevitably turns.
The importance of valuation.
Our primary job as investors is to determine what something is worth and pay less for it. We feel we have no advantage in the world of speculation and do not make investment decisions based on the belief that we can overpay for something because another fool is willing to pay more. Instead, we value investments on their fundamentals, use conservative projections, and only invest when we can do so at a price discounted to this.
The importance of market (in)efficiency.
It is our view that the market is broadly efficient. This makes superior investing hard. It is also our view that there are pockets where markets are less efficient. This makes superior investing possible. In our investment decisions, we must work hard to balance our own analysis of value with the realization that we do not exist in a vacuum. Others intelligent individuals might well analyze the same opportunity and make different but intelligent decisions based on their analysis. We cannot be so arrogant as to assume our opinion is the only one or that it is necessarily correct.
There is no crystal ball.
We have no advantage in predicting if interest rates will be raised or lowered, who will be elected president, or what is in store for the global economy. We have no crystal ball and do not believe that other investors or managers have one either. As such, we do not make our investment decisions based on the forecasting of such events. Instead, we perform bottom-up analysis where we believe we may have an advantage at understanding a reasonable future and discernment in our confidence.
Wisdom of giants.
Our investment philosophy stems from the thoughts and wisdom of giants. We attribute most of these beliefs to inspiration from the likes of Buffett (Berkshire Hathaway), Marks (Oaktree Capital), and Taleb (“Fooled by Randomness”). While our fundamental investment principles and philosophies may add nothing new to the world of investing, we don’t feel they need to. Stating such beliefs is neither critical to our success nor important for us to accomplish. Acting upon them is.