market folly

Today we're pleased to present you with commentary from Mark Massey's hedge fund AltaRock. Since his money managing inception in 1989, Massey has outperformed the market with a compound annual growth rate of 11.1%. AltaRock is long-term oriented and the results serve as a perfect testament from investors with the same focus.

The main reason we wanted to highlight their mid-year letter to partners is because Massey outlines some very Warren Buffett-esque tenets of investing. And Buffett, of course, inherited many of these ideologies from his mentor Benjamin Graham, the author of investment classics such as The Intelligent Investor and Security Analysis. Just like Graham and Buffett, AltaRock treat their positions not just as pieces of paper, but as actual ownership stakes in a given business. They approach their portfolio as a conglomerate with various subsidiaries and are looking for numerous characteristics in their investments. While the letter delves into these in much more detail (a must-read), we've outlined the criterion broadly below:

- Sustainable Competitive Advantage
- Strong Profitability
- Shareholder Friendly Management
- Sell Necessities
- Global Diversity
- Strong Balance Sheet
- Strong Free Cash Flow
- Good Growth
- Cheap Valuation
- Current Long-Term Expectations
- Historical Context

And while these generalized characteristics are staples of fundamental investing, AltaRock truly drills down the specific traits they are looking for in each category. The key here is that they approach their fund as a conglomerate owning various other businesses. As Benjamin Graham said in our quote of the week, "Investing is most intelligent when it is most businesslike."

In addition to laying the framework above, AltaRock's Massey also touches on the dilemma of holding cash versus investing it. Many investors view cash almost as an asset class of its own as it always has a place in a portfolio. On the topic, Massey writes,

"While cash currently pays us nothing, it does provide us with the potentially valuable option of snapping up bargains that may emerge in the months and years ahead. We find ourselves equally convinced to hold more or less cash as we focus alternatively on the potentially poor macroeconomic environment on the one hand, and the cheap prices of the very high quality companies we currently own on the other hand.

When the market is declining, cash always feels great, but to the extent that we can find excellent long-term investments in superior businesses, we don't want to forgo them. A bargain in a great company is our holy grail; to ignore it in the hopes of even better deals in the future seems foolish to us. After all, we can never really know if a better bargain will appear in the future, but we do know with near certainty that a great business purchased today at a bargain price will compound our wealth at healthy rates over the long term and with very little risk of loss."

These are truly words of a fundamental investor. If you think about, legendary manager Seth Klarman at Baupost Group typically holds an abnormally large amount of cash on hand for a myriad of reasons. While this can serve somewhat as a hedge during down markets, it is more-so a function of having dry powder to invest when compelling prices arise. Massey highlights what a conundrum it can be when balancing bottom-up company fundamentals and a top-down macro assessment.

While the macroeconomic environment is admittedly concerning to them, they are still confident that the underlying tenets above will provide them with safety and wealth generation going forward. A fantastic approach to investing is outlined in AltaRock's hedge fund mid-year letter embedded below:



You can download a .pdf copy here.

To learn the pillars of fundamental investing, there is nowhere else to point you but Warren Buffett's recommended reading list. The approach outlined above is decisively Buffettesque in its focus on owning a business rather than a stock. For more on a value investing framework, head to our fundamentals reading list and for more great market commentary from top managers, check out our latest coverage of hedge fund letters.