Cecropia Capital pursues a concentrated value-investing strategy through both a private investment fund and managed accounts. Our strategy is based on the conceptual framework of Benjamin Graham, Warren Buffett, Joel Greenblatt, David Tepper, and Monish Pabrai.
The key elements of our strategy are:
- We aim to buy above-average businesses at below-average prices.
- We hold a handful of positions in businesses we believe have reasonable odds of doubling to tripling in price in 2-3 years, while posing minimal risks of permanent capital loss.
- Our 3-5 year long holding periods contrast with the rest of the market’s hyper-focus on the short-term.
- We believe that the most contrarian thing an investor can do is to think for himself.
Over a 40-year stretch, to not invest in the cheapest stocks would have cost you over $10M on an initial $10k investment. A market-average strategy would have produced less than $2M, while a deep-value strategy would have returned almost $12M.
By holding our positions for 3-5 times as long as the market average, we believe we double our odds of predicting changes in the business’s price.
As a whole, the market is very short-sighted. (As an example, the average mutual fund holds its positions for about a year.) Over a 1-year horizon, 60% of the change in the business’s price comes from random market fluctuations, and just 40% comes from changes in the underlying business. However, over a 5-year horizon, 80% of the change in the business’s price comes from changes in the underlying business, while just 20% comes from random market fluctuations.
Great investments are rare. We search for the few opportunities which we believe have high odds for significant appreciation, and low odds for significant capital loss. We concentrate our capital on our 8-15 best ideas. Holding 8 securities captures 83% of the possible diversification benefit achieved by owning 1,000 or more securities, while holding 15 securities captures 91% of the possible diversification benefit.
Volatility is our friend. Downturns are not a time to panic. Volatility provides opportunities to buy businesses at large discounts and to sell businesses at fair to expensive prices. For the long-term investor, the only risk that matters is the risk of permanently losing your capital.