Our Investing Philosophy - Update #1

Update #1

We shared our investing philosophy early in the launch of our newsletter, but as we approach 1,000 subscribers, we wanted to revisit it. Not only for those who missed it the first time, but also to incorporate some additional principles we feel are essential.

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Our investment philosophy can be characterised by the following core principles:

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1. Keep It Simple

"Simplicity is the ultimate sophistication." – Leonardo da Vinci

Complexity doesn’t equal success. Our goal is to strip away the unnecessary and focus on what truly matters. In line with this principle, we’ll keep the rest of this article as concise as possible while still explaining our core principles.

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2. Asymmetry:

We seek investments where the potential upside far outweighs the downside. This focus on favourable risk-reward ratios allows us to aim for outsized returns while keeping risks under control.

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3. Concentration:

"Diversification may preserve wealth, but concentration builds it." – Warren Buffett

We hold 8 to 12 stocks, striking a balance between mitigating company-specific risk and avoiding over-diversification. This focused approach lets us develop deep conviction in each holding and pursue meaningful returns. This focused approach allows for a deeper understanding of each investment, reducing the risks associated with spreading ourselves too thin and ensuring that every position we take is backed by strong conviction.

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4. Long-Term Perspective

Our strategy prioritises patience. We ignore short-term noise, allowing our investments the time they need to compound. Patience also extends to holding cash when markets lack opportunities—waiting for "the good cards" ensures capital is deployed wisely.

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5. Contrarianism

To achieve above-average results, we’re willing to go against prevailing sentiment. True contrarianism, however, requires deep analysis and reasoned conviction—not simply disagreeing for its own sake.

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6. Balance

Managing a concentrated portfolio requires careful oversight. By balancing risk across holdings and maintaining an adaptable strategy, we ensure that individual positions don’t jeopardise the portfolio as a whole.

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7. Approximations to Deal with Uncertainty

"It is better to be roughly right than precisely wrong." – John Maynard Keynes

Markets are unpredictable, and uncertainty is a constant. Instead of seeking unattainable precision, we embrace well-founded approximations of intrinsic value and growth estimates. This approach acknowledges the limits of forecasting while keeping us grounded in rational, informed decision-making. By focusing on being "roughly right," we avoid the overconfidence and rigidity that can come with overly precise calculations.

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8. Risk Management

Risk is central to everything we do. We build in a margin of safety, hold cash reserves, and use a barbell approach: concentrated positions balanced by significant cash allocations. Cash isn’t just idle—it’s a strategic asset that allows us to act decisively when opportunities arise.

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9. Don’t Get Stuck in a Box

Flexibility is key. We remain open to new ideas and are willing to change our minds when needed. Writing this updated article is an example of that adaptability.

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Stock-Specific Principles

Twin Engines

Great returns often stem from two factors working together:

1. Earnings Growth – A company’s ability to expand its profits over time is critical.

2. Valuation Expansion – As the market recognises a company’s quality, its price-to-earnings (P/E) ratio often rises (or other).

When these “twin engines” align, they drive exponential returns. However, we avoid over-reliance on either: growth must be sustainable, and valuations should leave room for future appreciation.

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SQGLP Framework

Overall, when assessing a stock, we use the SQGLP framework to identify companies with the potential for outsized performance:

• S: Small Size – Smaller companies have more room to grow, but this isn’t a hard rule. Some mid- or large-cap companies may still offer asymmetric opportunities.

• Q: Quality – Strong fundamentals and exceptional management are non-negotiable. We favour companies led by owner-operators with "skin in the game."

• G: Growth – Consistent earnings growth is essential, but not at any price.

• L: Longevity – A sustainable competitive advantage, or moat, is critical for withstanding competition and maintaining returns over the long term.

• P: Price – Everything comes back to valuation. A great business bought at the wrong price can still be a poor investment.

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But remember…

No framework is perfect! Markets evolve, and exceptional opportunities often lie outside rigid criteria. Being "roughly right" is more effective than being narrowly precise, so while SQGLP serves as our compass, we remain open to outliers that don’t fit neatly into the box.

This flexible, stock-specific approach ensures we’re prepared to capitalise on opportunities while staying grounded in our core principles.

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We hope you enjoyed this post. If you found it valuable, feel free to share it, and stay tuned for future posts!

Until next week, happy investing.
The S.C. Team

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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.