Baines Creek Partners

One must not only pay attention to the return produced from a particular investment but also the risk taken to achieve that return. Outcome alone does not prove a decision right or wrong – determining the amount of risk taken to achieve an outcome is just as important, if not more important. We define risk as the likelihood of long-term capital impairment. By this definition, volatility is not a measurement of risk.

Financial markets tend to be efficient in the long-term, but not necessarily in the short term. Humans shape financial markets, and as a result, they can go to emotion-driven extremes. This means that most of the time markets are priced appropriately, but in the short term price can become dislocated from value. We do not attempt to time the markets, but take the opportunities that the markets give.

We utilize a bottom-up, value oriented, fundamental approach. We do not attempt to predict future movements of the markets or macroeconomic events. We look for securities that are priced at a significant discount to our estimate of intrinsic value. The best opportunities present asymmetric upside potential: a high probability and high magnitude of return with a low probability and low magnitude of loss. These types of opportunities are rare during most market conditions and most easily found during periods of extreme market distress.

While diversification can mitigate company-specific risk, it also reduces the company-specific potential return. Since we are seeking asymmetric risk-reward opportunities, it is of little benefit to diversify away a small risk when it is coupled with a large potential return. Therefore, when appropriate, we concentrate in our best ideas.

We believe that our investment philosophy should be applied in an opportunistic manner. Those asset categories that offer the greatest discount to intrinsic value (and the most attractive prices) shift as investor preferences shift. As a result, our portfolio tends to shift towards those areas that are obscure, out of favor, or misunderstood. Return is mostly driven by favorable purchase prices, which are found by constantly re‐evaluating investment opportunities with respect to changing market sentiments and economic conditions. Specializing in a single asset class or market segment could reduce both the frequency and number of favorable investment opportunities.

Being opportunistic and value-oriented, we attempt to purchase only when price has diverged from intrinsic value. Since markets tend to be efficient in the long-term, we seek to take advantage of short-term inefficiencies and believe that price and value will eventually converge. For that reason, we are willing to hold investments for the long-term and believe that any manager's performance should be judged on a rolling 3-5 year period. Using any shorter period would allow chance, as opposed to investment skill, to distort results.