At Vincent Capital Management, our north star is absolute performance, and we structure everything we do around this goal. Generally, we seek out businesses that have defensible business models, operate in attractive markets that are growing with good economics, and are led by level-headed executives. At the same time, we seek companies at prices which are well below their long-term value potential, often at times where there are short or medium-term price dislocations. Our approach is based on fundamental analysis and common sense, with a key distinction in our ability to concentrate on a select few high-conviction ideas, stay flexible in our decision-making, and patiently wait for the right opportunities.

Our investment philosophy can be summarized as follows:

Advantaged businesses operating in attractive end markets: We are looking for businesses that operate in profitable, predictable, and growing markets, have a strong and widening competitive advantage, and are led by a level-headed and honest management team. A few common traits that we look for are attractive organic growth, high incremental returns on capital, ample free cash flow generation, a solid balance sheet, and sensible capital allocation.

Companies trading well below their long-term fair value: We aim to find businesses trading significantly below their long-term fair value. We prefer to find businesses which can increase their fair value through growing free cash flow and friendly capital allocation, rather than merely valuation expansion.  

Concentrated portfolio: We concentrate capital towards our highest conviction ideas. Typically, our strategy consists of just 3-10 investments globally, we intend to hold for the long-term. We do not focus on traditional diversification and risk metrics when constructing our strategy but rather focus on business quality, earnings visibility and valuation discipline.

Pragmatic opportunism: We like to take advantage of asymmetric situations, where a company’s current price is far below its long-term potential. From time to time, the market provides such opportunities. Typically, this occurs when a company is going through short-term difficulties or during larger market drawdowns. We take a highly flexible approach and are willing to change our mind about existing investments if new and better opportunities arise in the market.

At Vincent Capital Management, we are strong believers in Mungers famous “inversion” concept. It’s well-established that most active fund managers fail to outperform the market indices over time. So, while contemplating the types of strategies that have the potential to outperform over time, we decided to apply the inversion framework. So, what are some of the lessons we have taken from the persistent underperformance of the fund management industry? What should we avoid? To sum it up, we believe today’s institutional fund management industry is built primarily to grow and protect assets and cater to the needs of asset allocators, which prefer clean investment style categorizations and low volatility. These dynamics have produced an abundance of overdiversified portfolios optimized for largely short-term risk metrics with far too rigid of investment styles.

Below we summarize some of our thoughts:

Misaligned Product Design: Portfolios are often created to fit specific asset allocator frameworks (e.g., niche strategies targeting singular investment styles, factors, or geographic/sector clusters) rather than portfolios aimed at outperforming market indices over the long-term.

Overdiversification & portfolio construction: Many managers are overdiversified and optimize portfolios to reduce short-term volatility. This too often results in index-hugging or style/factor replications, instead of prioritizing long-term factors like earnings, cash flow, capital allocation, and valuation. While this may be a good strategy for the asset manager itself, it is to the detriment of long-term performance.

Institutional structure & misaligned incentives: Institutional frameworks discourage changes of opinion or making mistakes, creating a risk-averse environment that stifles honest discourse and an ability to reverse course. Furthermore, there’s an overemphasis on maintaining consistent messaging and avoiding style drift, rather than adopting a flexible, first-principles approach to decision-making.