Built on our foundations, Kalakau Avenue's investment philosophy comprises 7 principles. Alongside our mission, these serve as our north-star not only for all investment decisions but also for all organisational decisions.
- Risk is the likelihood of permanent capital loss: More simply, risk is the likelihood of losing money. We do not focus on price volatility though we do care about business volatility. We must also be conscious of the other risk faced — missing opportunities and not generating adequate returns (i.e. opportunity cost). Our investment approach tries to balance these risks with a focus primarily on the former.
- Focus on the long-term: Repeatedly predicting short-term price movements in markets or individual securities is incredibly difficult and can lead to value-destructive behaviour. It is outside our circle of competence. Our long-term capital base, combined with our culture and rational decision-making process, affords us the advantage of focusing only on long-term value.
- Highest-quality assets: If we are to focus on the very long-term, then we must assume our assets will face hard times at some unknown point. We need to ensure that our assets can survive the path, perhaps even become stronger as weaker competitors are impaired, and emerge with long-term value intact or even enhanced. This kind of durability exists only in the highest quality companies.
- Deep research: To determine long-term fundamental value and to have conviction in our views during times of severe price movements, we need to understand the companies in the portfolio at a deep fundamental level, always from first principles, and always relying only on our own work.
- Valuation focused: We seek to own assets at discounts to their fundamental value. It provides a “margin of safety” for when things go wrong. Valuation for us is more a risk mitigant than a return driver — we do not aim to predict multiple expansion, rather our returns will mostly come from the long-term compounding of intrinsic value.
- Humble concentration: A concentrated portfolio is a must if we are to undertake deep research and build strong conviction with finite resources. However, we recognise that the world is unpredictable and that we will make mistakes. We are therefore mindful of our exposure to any single company, industry, or theme. A portfolio of 10-15 companies is a great balance between concentration of research efforts and diversification of risks.
- Cash is the default investment: When attractive investment opportunities cannot be found, we will hold cash. However, we recognise cash is an inferior asset to hold over the long-term. We must work hard to find investments and may return capital to our partners when we cannot.
