Hunting Investments Versus Foraging for Deals

BigGameTrainAround the LEV office we like to differentiate between “hunting” and “foraging.”  What does that mean?  How can it help your approach to finding great companies that meet your investment criteria?  Also, what makes our thesis different and difficult to follow?

For the management of LEV’s investment fund, we are charged with locating great companies to invest in at fair valuations, such that we can have a reasonable expectation of a positive outcome that exceeds our return on capital hurdle.  These companies can be thought of as our food and are necessary for us to survive and thrive.  We hunt certain types with great fervor and gather others along the way out of curiosity and convenience.  All of this forms an interesting metaphor (which I am likely to over-use in this post), as we intend to bring home the bacon for our partners.

Because our ideal game is rare and difficult to bag, we tend to be open to several ways to accomplish success.  However, we have found that certain approaches are unlikely to nail our targets and quickly steer clear of them (real estate, life science, transportation, etc.)  You could think of these as the quicksand and rocky cliff edges in our world that we have already tested our thesis on without much success… and have lived to tell about it.

Furthermore, we believe it necessary to be armed with sufficient knowledge of an industry or sector such that we can keep up with the insider jargon and add value to drive rapport.  Today, we work in agriculture, finance, and niche industrials. Familiarizing ourselves with this terrain allows us to move quickly around and between each domain.  We appreciate similarities between industries while still enjoying diversification and independent market cycles.

We also like to learn and teach across domains to expand our expertise and raise up prospective teammates.  By first being helpful we are given local tips and guidance.  We like to return the favors.  Sometimes this means introductions to key contacts or exposure to fresh lines of thinking.   There are many marksman tucked in the bush, and tromping through the landscape.  Most of them are doing their best and taking a unique approach that can inform us as to where our ideal game may be lurking.

We always carry an enabling-technology insight we intend to exploit.  This is among the tools unique to us that provides us an edge.  We also carry a relatively high ratio of cash to enterprise value compared to our competition. While they fumble around for financing, we close deals.

Most important however, is knowing the specific profile of our target company.   Today, and for the foreseeable future, the profile multi-bagger includes traits like high gross margin, dominance of current assets & strong cashflow, to name a few.  The culture and team are critical as well.  A complete profile deserves an entire blog post itself.  This fuzzy image is what we hold in our mind’s eye while we stalk, and what we tell stories of around the camp fire. They do exist, because we have possessed them first hand.

The reality is, we are a rare band of huntsmen uniquely equipped to achieve success. We cannot guarantee when, but we will know it when we see it, and we will act appropriately. In the meantime, we may scoop up a few nuts and berries to sustain us until then.  This is what we call “foraging”, or sometimes “dabbling.” Without some of this along the way we may not live long enough to nail the really note-worthy targets.  Also, we can cautiously explore new lands without much risk which increases our survivability and is ultimately the reason our partners trust us to go forth and conquer, because we will survive to return to them in excess.

What tools do you carry?  Are you inclined to hunt or forage?  Can you have success doing a bit of both?  What about planting a few seeds and going agrarian? (sorry for that… figured why not take the metaphor all the way?!)

 

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