At Phronimos Capital, we attempt to stand on the shoulders of the giants of value investing. Our investment philosophy is shaped by some of the most successful investors over the past 100 years, including: Benjamin Graham, Seth Klarman, Howard Marks and Warren Buffett. Furthermore,  our quantitative, evidence-based approach to deep value investing incorporates the empirical findings of Eugene Fama (University of Chicago), Kenneth French (Dartmouth), Joseph Piotroski (Stanford), Eric So (MIT), Tim Loughran (University of Notre Dame), Jay Wellman (Cornell), Wesley Gray (Drexel) and Jack Vogel (Drexel).

With the help of some of the aforementioned practitioners of value investing, we distill our investment philosophy below:

Price Discipline/Margin of Safety

“Value investing involves the purchases of bargains, the proverbial dollar for fifty cents…Buying such bargains confers on the investor a margin of safety, room for imprecision, error, bad luck, or the vicissitudes of economic and business forces.” --Seth Klarman

“It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough. . . No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right.” – Howard Marks

“The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.” – Berkshire Hathaway Letter to Shareholders 

Predicting the future is not a gift we have been endowed with. This requires that we buy at large discounts to intrinsic value and/or use a systematic quantitative deep value strategy that eliminates behavioral biases.

We find value by pursuing securities that are out of favor, overlooked, or misunderstood--where an analytical, or behavioral edge is more likely, as compared to popular securities, which are well understood by most investors.

Volatility Is Not Risk

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."--Warren Buffett

“Successful investors like stocks better when they’re going down. When you go to a department store or a supermarket, you like to buy merchandise on sale, but it doesn’t work that way in the stock market. In the stock market, people panic when stocks are going down, so they like them less when they should like them more. When prices go down, you shouldn’t panic, but it’s hard to control your emotions when you’re overextended, when you see your net worth drop in half and you worry that you won’t have enough money to pay for your kids’ college.”--Seth Klarman

We do not share the common view that volatility is risk. While volatility can be distressing, it often creates exceptional investment opportunities for those poised to exploit it. We believe that a great price ultimately trumps the discomfort of volatility. Instead, we define risk as the possibility of permanent loss of capital. Consequently, for our concentrated deep value strategy, we seek to manage the risk of a permanent loss of capital by: 1) avoiding industries and geographies that are outside our circle of competence; 2) limiting exposure to cyclical companies with weak balance sheets--an approach that we believe significantly reduces the risk of permanent loss of capital for investors with long term investment horizons in excess of 10 years; and 3) buying the securities of these companies at prices offering a significant margin of safety. In the quantitative deep value strategy, Phronimos Capital seeks to manage the risk of a permanent loss of capital through diversification. We also recognize that unexpected bills do not always coincide with market-tops, and therefore, for long-term investors unable to handle significant volatility, we may attempt to mitigate drawdowns through hedges and/or lower equity exposure.

Patience

"Value investing is a long-term orientated investment approach—never to be confused with short-term speculation—that requires considerable patience, discipline and rigor.” – Seth Klarman

Value investing is not a short-term investment or arbitrage opportunity. A deep value portfolio will inevitably endure periods of underperformance and/or declines.  We believe that staying the course of a contrarian, deep value investment strategy--especially when the herd’s techniques appear to be more successful, and the crowd’s psychology is such that fear blinds opportunity or greed masks danger--is a necessary condition of capturing the value premium.   

A long-term investing time horizon allows us to "time arbitrage" other investors. Most investors prize liquidity – they want the ability to sell or buy an investment at any time without moving the price up or down. For that reason, illiquid stocks sell at a discount. Those investors willing to buy illiquid stocks have to be compensated for the fact they are acquiring an asset that is not as attractive in the eyes of most investors. The discounted price gives the patient investor the opportunity to reap excess returns over time.

We believe the gap between market value and intrinsic value of a deep value security is rarely narrowed in a quarter or even one year. Consequently, we discourage investors with short investment time horizons (less than 5 years) from deploying assets with us.