Value Investing

EAO Capital uses the principles of value investing and diversification as the foundation for all of our investment management discussions:

Exceptional investment outcomes - both positive and negative - often stem from a future that turns out to be significantly better or worse than what was already priced into the investment at the time of purchase.  

Using the bird in the hand analogy, it is only later, when we discover whether there were actually two birds in the bush - rather than, say, one or five - can we assess whether the trade-off was worthwhile.

Investment Styles

When actively seeking attractive investment opportunities, one of the most common approaches is to look for high-quality businesses trading at fair (or better) prices.

This “growth at a reasonable price” or GARP style of investing is akin to saying two birds in the hand are worth two in the bush - if the birds in the bush are laying eggs.  With patience, we can expect the bush to yield many more birds, which will make the higher price we paid today seem like a good deal in hindsight.

Another approach is "deep value" or "cigar butt" investing, which involves buying unremarkable businesses at remarkably low prices.  An extreme version of this would be to say a bird in the hand is worth zero birds in two bushes - if we can dig up those bushes and sell them to a landscaper for one bird each.

A passive investment strategy, by contrast, assumes that in an extremely competitive marketplace you are unlikely to consistently identify superior individual investments.  Instead of over-analyzing, it is better to favor broad diversification with the expectation that, overall, the results will be satisfactory.

Regardless of the approach, any sensible investment philosophy is based on the principle that what you give up today should be less than what you expect to receive tomorrow.  

In all instances it is important to understand:

• How will the future value come about?

• How does the future value compare to the current price?

• How likely is it that the expected outcome will actually happen?

At EAO Capital, we consider the relationship between price and value to be the single most important factor for investment selection.