Multi-Faceted Investment Framework
At Meritocracy Capital Partners Inc. (“MCP” or “we”), we review a long checklist of desirable investment traits every time before investing in a company. These traits reflect the investment principles we hold. For example, we adhere to value investing, which means we only buy companies at attractive prices relative to their earnings potential or liquidation value.
To provide our clients with steady income as a cushion against market volatility and supplement investment returns, we also practice cash flow investing. At MCP, this means only investing in companies that return capital to shareholders in the form of cash dividends and/or common share buybacks (a.k.a. repurchases).
We have combined these investment principles to minimize our clients’ exposure to risks and maximize their rewards. Our experience tells us our approach is also consistent with a low volatility style of investing, too.
Researching companies is not a purely quantitative exercise though. There are also many qualitative aspects to consider. Before investing in a company, we also research the company’s:
2. Metrics, and
We call this the M/M/M Framework™. Though each facet appears to be separate from one another, they are inextricably linked to each other. For example, we know from experience that superior management often shines through with enviable operating and financial metrics. This often, but not always, gives rise to a defensive moat. You can learn more about the M/M/M Framework™ below.
The right people don’t need to be tightly managed or fired up; they will be self-motivated by the inner drive to produce the best results and to be part of creating something great. – Jim Collins
Companies are not just collections of manufacturing plants, intellectual properties and marketing campaigns. They are like living organisms with unique behaviours. Consequently, MCP is most interested in firms that exhibit the behavior of disciplined management.
An area indicative of disciplined management is how companies manage their people. MCP seeks to invest in companies that have internal training programs, a policy of promoting from within, and a history of long management tenures.
MCP believes companies that exhibit these traits are more likely to have disciplined and committed employees, too. This should facilitate more effective organizational learning and would allow them to better learn from past failures and build on previous successes.
What gets measured gets done. – Tom Peters
MCP carefully researches the operating and financial metrics before investing in any company’s common shares or bonds. Consistent with our preference for discipline management, MCP seeks to invest in companies that have a history of continuous improvement. We believe such companies are more apt in sustainably growing their bottom lines.
A metric of continuous operating improvement that MCP monitors in its investee companies is market share. This is a particularly important metric for any company as MCP believes it is indicative of pricing power.
MCP also finds that market share is tell-tale sign of the competitive strength a company has over industry rivals.
The key to investing is determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. – Warren Buffett
A company with a competitive advantage generates above average profitability and can compound wealth over long stretches of time. It is analogous to a moat around a castle because it thwarts competition and acts as a barrier to entry.
One particular competitive advantage that MCP considers is economies of scale. It provides cost advantages to incumbent firms as production grows. New competition needs to think twice before risking capital to enter the marketplace.
Economies of scale are also evident when a company’s profits grow faster than its revenues. When this happens, profits accelerate given every added dollar of sales results in greater and greater profits.
High Quality Investment Portfolios
MCP practices quantitative investment principles such as value investing and cash flow investing to minimize our clients’ exposures to risks and maximize their rewards. Our experience tells us this also is consistent with a low volatility style of investing, too.
Not all our research though is quantitative. We also take a qualitative approach. The M/M/M Framework™ provides a disciplined, multi-faceted approach to how investment decisions are made at MCP. By scrutinizing the management, metrics and moats of each common share or corporate bond, we build investment portfolios that are comprised of high quality companies. We are confident this research-driven approach will help us meet our fiduciary duty and our commitment to protect and grow our clients’ wealth.
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