Wax Asset Management is an investment firm established to generate capital appreciation for clients through the use of a patient value-based investing strategy. The firm invests in a concentrated selection of mainly U.S. listed equities, emphasizing capital preservation and risk control by demanding a large margin of safety prior to initiating an investment.
The intrinsic value of any company is the sum of its discounted future cash flows. These cash flows are identified by examining a company's true cash generating power over the course of economic cycles. This entails understanding a company's competitive position, regulatory environment, margin structure, business sustainability and management. It is also important to gauge a company's assets and liabilities to ensure that its balance sheet will allow it to survive economic downturns. Taking all of these factors into account, and using conservative assumptions, we are able to generate an intrinsic value range for a company. Only if the stock of such a company is below or near the bottom of the value range, and provides us with a good risk/reward payoff will we look to initiate a position. This margin of safety provides us with room for error and built in risk control, allowing us to minimize capital losses in the event that we are wrong.
The firm also employs its value based strategy, if in our balance sheet analysis we find stocks trading below liquidation value or with assets that we are confident are worth more to another company or spun out. Although the firm is not an activist investor, in these situations it will be opportunistic and reach out to management and/or the board when appropriate.
It is important to note that the firm defines risk as the permanent loss of capital. Risk is not near-term underperformance or volatility. When we invest, our first concern is the return of our client's capital; the return on capital comes second. Defense comes before offense. We readily admit that both the stock market and the economy will do things in the short term that we cannot control and we cannot predict. That is why our stocks are only bought after we have priced in a large margin of safety. When bad things happen in the market, the economy, or to our companies we are not overly concerned given our strict stock selection criteria. In fact, in almost all cases we welcome short-term issues in order to take advantage of lower prices and increase our position. If something is worth 1$ and is trading at 50c, we are all too happy to buy more if it starts trading at 40c. Of course, there will be cases where an investment of ours does not work out as planned. When this happens, the risk of a large loss is lowered given the wide margin of safety we demand prior to owning a stock, allowing us to reinvest the capital in better ideas.
We generate ideas by constantly reading, researching and looking for stocks that are overlooked, underfollowed, or unloved on Wall Street. Often we find the investment community devotes less time and effort to researching out of favor companies and industries. This allows us to find situations where the issues that led to the stock being out of favor are transitory in nature, and the market is overreacting, or the market has overly discounted a real problem, enabling us to buy stocks at attractive valuations. There are also thousands of smaller capitalization stocks that are not followed at all by Wall Street analysts. By focusing on stocks that fewer investors pay attention to, we can take advantage of potential inefficiencies between the stock price and the company's actual worth. Given our goal of maximizing long term performance we are comfortable owning out of favor stocks with near term headwinds or headline risk as well as less liquid stocks. Although this can lead to periods of underperformance, we are more than happy to wait for better long-term returns. We view our extended time horizon, focus on investing in stocks that investors overlook, and willingness to endure periods of underperformance as competitive advantages for our firm, and a source of outperformance over time.
In summary, our goal is to maximize long term performance by constantly looking to buy $1 for 50c. By being long term oriented and having the bulk of our assets in only 10-20 stocks we can be patient and deploy our capital in these rare situations when they occur. We are not forced to own stocks just for the sake of having exposure. This ensures that when we do buy a stock there is a large margin of safety in case things go wrong, but allows for outsized returns if we are even half right. Additionally, by being concentrated, our client's capital is only employed in stocks specific ideas that our firm has thoroughly researched and is willing to own for years. We are never trying to time the market or make economic predictions. Lastly, by trading less and reducing turnover, our firm allows for higher after-tax returns and lower transaction costs. We understand that this method of investing is not for everyone, and given our concentrated and value based nature there will be periods of underperformance, especially during times of speculative excess. That being said, we strongly feel that our disciplined and value-based investing style is well suited for the patient long term investor.