Investment Philosophy
The investment philosophies and beliefs of Lifted Falls Capital are reflected in the following. Our company specializes in capital allocation, mostly in private markets, where we aim to buy and establish long-lasting, solid companies. Our objective is to compound value at higher rates of return while assuming less risk than is appropriate given the returns obtained.
Comprehension and appreciation of risk
We could characterize our work—and the work of all for-profit businesses worldwide—as strategically assuming risk in order to make money. We believe that operators and investors must consider both the risk involved in generating a given return as well as the return itself. A decision's outcome by itself does not validate its rightness or wrongness; assessing the level of risk required to reach a particular result is equally, if not more, important.
Risk can be defined in two ways:
The likelihood of long-term capital impairment
The likelihood of missed opportunity
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Furthermore, it should be noted that, in contrast to many market theorists, volatility does not, by the definitions given above, equate to risk, with one significant exception: in situations where there is an immediate need for liquidity. This can take many different forms, most of which result in the asset owners being forced to sell their assets. Debt is among the most obvious instances of this risk. If not properly managed, debt creates event horizons that put businesses at risk of volatility if there isn't enough liquidity to weather that storm. We believe that when we properly manage our leverage and liquidity, volatility can lead to opportunity. We generally use leverage to offset the cost of equity when looking to finance an acquisition with outside funding, but never to the extent that it exposes us to short-term volatility.
Lastly, we most definitely don't avoid risk. In the appropriate situation and at the appropriate cost, we enthusiastically embrace it.
Commitment to long-term value
In contrast to many in the private investment markets, we are not seeking to buy and sell businesses within the conventional 5-year horizon. We believe we have a much better chance of creating a higher return over a long-term 10-20-year period where we can make lasting business decisions, reduce taxes, transaction fees, and risk. We prefer partners with similar long-term values, but we are aware that many business owners need liquidity, in which case we will buy out the seller's equity stake.
Driving down to intrinsic value
We employ a basic quantitative, value-oriented, bottom-up methodology. We make no effort to forecast future macroeconomic developments or market movements. We seek out premium assets with solid recurring profits at affordable prices. We seek to invest in opportunities where the assets are priced below what we believe to be their intrinsic value. We frequently search for opportunities where merging businesses with our current assets will reduce risk or speed up value creation.
We emphasize the team that manages the target business. We firmly believe that, provided the company has a sound business model, the leaders' aptitudes can both predict future returns and reduce risk. The best opportunities offer asymmetric upside potential, or a high probability of large returns paired with a low probability of small losses.
Eliminating emotion through careful unbiasedness
Temperament is one of the most important factors in successful investing. Those who strive to comprehend intrinsic value and eliminate emotion when evaluating opportunity and risk, whether positive or negative, will encounter the best opportunities. During prosperous times, markets often overestimate opportunity and underestimate risk, leading them to assume greater risk than the possible returns. On the other hand, during turbulent times, markets often overestimate risk and underestimate returns. Investors can find substantial return opportunities and disproportionately low risk if they have the correct attitude and the discipline to comprehend intrinsic value.
As investors and operators, we have seen this firsthand. We are well aware that, like all people, we are prone to biases and temperamental swings that can reflect market trends. Because we are not immune to these phenomena, we have established diversity and accountability structures that enable us to recognize our prejudices and make logical, emotionless decisions. Managing temperament and generating higher risk-adjusted returns are made possible by our core values and our dedication to a patient, disciplined, and contrarian mindset.
Seizing opportunities during market imbalances
Financial markets are generally efficient over the long run, but can pose imbalances in value in the short term. This is because markets are shaped by humans, so they are susceptible to emotional swings. This indicates that although markets are typically priced correctly, prices may temporarily deviate from their value. We seize the opportunities presented by the markets rather than trying to time them.
Understanding where we are in the business cycle
We don't try to forecast the direction of the market, but we do our best to identify where we are in the business cycle and adjust our expectations and risk accordingly. We are unable to enhance this procedure or articulate our philosophy more effectively than by quoting Howard Marks, who says:
Risk arises as investor behavior alters the market. Investors bid up assets, accelerating into the present appreciation that otherwise would have occurred in the future, and thus lowering prospective returns. And as their psychology strengthens and they become bolder and less worried, investors cease to demand adequate risk premiums. The ultimate irony lies in the fact that the reward for taking incremental risk shrinks as more people move to take it. Thus, the market is not a static arena in which investors operate. It is responsive, shaped by investors’ own behavior. Their increasing confidence creates more that they should worry about, just as their rising fear and risk aversion combine to widen risk premiums at the same time as they reduce risk. [We] call this the “perversity of risk.”
Marks, Howard. The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing) (p. 84). Columbia University Press. Kindle Edition.
High price/earnings ratios, narrow credit spreads, unruly investor behavior, excessive leverage, and robust demand for investment vehicles of all kinds are all consequences of this "richening" process. These factors create a high-risk environment in addition to increasing prices and decreasing potential returns.
Our strategy is to track these trends over the course of the business cycle, evaluate risk, and utilize the results to find opportunities.
Adapting to market sentiment
We think that an opportunistic approach is the best way to implement our investment philosophy. As investor preferences change, so do the asset classes that provide the biggest discount to intrinsic value (and the most alluring prices). Our mindset consequently tends to gravitate toward obscure, unpopular, or misinterpreted fields.
Favorable purchase prices, which are determined by continuously reassessing investment opportunities in light of shifting market sentiments and economic conditions, are the primary driver of return. The frequency and quantity of advantageous investment opportunities may be decreased by focusing on a single asset class or market niche.