A. EATING OUR OWN COOKING WITH HONESTY AND HUMILITY
We put our money where our mouth is by investing alongside our investors, maximizing the alignment of incentives. We eat our own cooking, viewing our investors not so much as clients but equal partners at the same table. Furthermore, if what we've cooked tastes subpar, we are honest with ourselves and in turn honest with our investors. There will be bumps along the way. We fully and humbly accept this inevitability beforehand, rather than reacting with humility after the fact. We take the long view, knowing that bumps can be followed by successes. At the end of the day, we hope that on net, our successes far outweigh our disappointments. Most importantly, we believe that in any business transaction or endeavor, integrity is paramount.
B. LOOKING DOWN BEFORE LOOKING UP
We strive for attractive risk-adjusted returns that compound capital over long periods of time. We seek to achieve long-term returns while taking less-than-commensurate risk. Hence, our first priority is not achieving attractive returns in and of themselves, but rather engaging in a consistent process that emphasizes risk control, preservation of capital and downside protection during turbulent markets and recessionary conditions.
C. CONSISTENTLY DOING A LITTLE BIT BETTER FOR A LONG TIME
While many managers shoot for the stars and achieve exceptional returns, especially during bull markets, such returns are often short-lived and achieved by taking more-than-commensurate risk. In bear markets and violent market reversals, this assumption of excess risk per unit of return can lead to significant losses of capital, erasing much if not all of the prior gains that had been achieved using the same risk management approach. It is very difficult for a zebra to change its stripes in reaction to market conditions. We would rather keep a consistent approach to risk control, year in and year out, irrespective of Mr. Market's mood and changing macroeconomic factors. By consistently minimizing permanent losses of capital and avoiding the losers, especially in bad times, we seek to do just a little bit better than the long-term average on a compounded basis. Over many years, this should result in significant capital appreciation, achieved while having taken substantially less-than-commensurate risk.
D. We focus on a specialized niche: the P&C insurance industry
P&C insurance is the sector to which Warren Buffett allocated by far the overwhelming majority of his discretionary capital, despite the industry being known for poor returns and destroying capital on a regular basis. Like Warren Buffett, we recognize that while most companies in the sector fall victim to the commoditized nature of the business, where price undercutting in pursuit of short-term gains in market share is the norm, the few companies that have a competitive edge can generate attractive risk-adjusted returns on capital for long periods of time. P&C insurance is ignored and misunderstood by most investors, and even experienced industry operators have difficulty seeing the forest for the trees, which has led to repeated destruction of capital in the P&C sector. Thus, as non-industry insiders with ample sector expertise, we have an advantage in being able to select companies with the most long-term compounding power.