Posted on April 7, 2014 by David Laidlaw

Our investment approach concentrates on investing in high-quality companies that sell for a discount to their intrinsic value. We spend a significant amount of time trying to understand whether or not the demand for the company’s products or services will endure for the long term since more constant demand reduces risk.

Part of this demand forecasting involves an analysis of how the particular goods or services are satisfying a basic human need or desire. Humans are biologically coded to responded to stimuli in a particular manner. Our basic genetic and evolutionary coding is expressed through a wide variety of behaviors and preferences, many of which may not be rational.

When evaluating a company, we look at competitors within the marketplace. Picking one company versus another often hinges on our determination that the selected company is doing a better job of satisfying a particular want or need.

Regardless of our higher aspirations, humans are driven by consumption. People demand easy access to their money to make day-to-day or luxury purchases. Paying with cash is inconvenient and it may not be safe to carry around lots of currency. Credit cards provide access to money without the use of hard cash. When we evaluated Visa, we looked at credit card purchasing patterns in the US and extrapolated the ramp up in usage to foreign markets where widespread use of credit cards was adopted much later. Visa was a natural choice since the company had the broadest acceptance and was also not taking credit risk.

This “network effect” is a common theme throughout our portfolios. Once more and more people start using a particular network (communication, delivery etc.), that network becomes more valuable and often turns into a natural monopoly. Google cornered the market on search, and thus advertizing, when it seized control of search from Yahoo over a decade ago. When people look for something online, they want access to that information immediately and Google meets that need. While it would be more reasonable for consumers to use another search engine like Bing to keep Google honest, it is not in people’s DNA to act in this manner. The need for ready access to information trumps other behavior.

Aside from information and cash, humans also want/need things. FedEx has built a business around this need that was not being satisfied by the post office. While the need for document delivery is in an unending secular decline due to the use of email delivery and electronic signatures, FedEx’s business continues to expand. Rather than documents, the company is delivering increasing numbers of packages as more commerce moves online. FedEx’s network is smaller than UPS, but FedEx is more efficient and therefore better satisfies the need.

These are just a few examples of our biologically or behaviorally selected investments.