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Investment Framework – Summary
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VCM manages its partnerships with a long-term perspective on investing. The investments are made in common stock of publicly traded companies with the expectation of holding them for several years or longer. Our goal is to achieve a return superior to that of the market while paying utmost attention to the preservation of capital.
Our Investment Framework is based on the premise that outstanding long-term results can be achieved by investing in a small number of extremely well run companies, while timing these investments so that they are long-term by nature. It is further based on a premise that when investors are buying and selling their positions in a company there is the ever present judgmental mistake of the majority of investors to equate an excellent company with an excellent investment. We exploit this systematic judgmental error.
Of course, the underlying premise of our entire approach is that the stock market is unavoidably inefficient. This inefficiency is at the very core of the market, and an astute and disciplined investor can rely on this inefficiency.
We can predictably rely on the behavioral tendency of many investors to extrapolate the past course of a company too far into the future. They often continue to attach a label of high quality to a company while ignoring its changing financial condition, or the company’s changing standing in its industry, or the changing standing of its industry in the economy as a whole.
At the same time, because we aware of these behavioral biases, we have developed a proprietary investment model that is intended to control our own similar biases. This model forces strict numerical representation of our investment parameters as well as parameters that describe the future characteristics of a company. Our investment system is based on this model and is designed to control and minimize our own judgmental biases.
We further control both our own bias and the general inherent risk of investing by monitoring exposure of our portfolios to a given industry, sector of an industry, and an individual company.
To further exploit behavioral weaknesses of most investors, we use our own classification system of industries. This system assigns companies to industries with results often far different from the standard classification systems, which are frequently based on superficial associations or continuation of trends.
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Content
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This document covers the following areas:
1. Margin of Safety
2. Value and Growth
3. Investment Risks
4. Risks of Investing in High-Technology
5. Dividends
6. Investing in Established Companies
7. Investing in Early Stage Companies
8. Investing in Ground-floor Opportunities and Unusual Opportunities
9. Evolution of our Investment Framework
10. Market Predictions and their (minimal) Role
11. Use of Debt
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Investment Framework – In Depth
Investment frameworks evolve – slowly in our case, but they do evolve. Market conditions change, industries come and disappear, company managements invent new ways to skin the shareholders, and regulators keep cranking out, what else… regulations. The Investment Framework described here will change: use caution and common sense when projecting it into the future. We ourselves do not know what it will be in five years. Our Cautionary Statement and Disclaimer may help you to be careful.
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Leverage, a Primer
This primer describes in very simple terms how borrowing is used by investment firms, and the accompanying risks and benefits. The primer describes only basic notions of borrowing and does not go into more complex and esoteric ways of leveraging an investment. Access to this document is restricted and requires access privileges.
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