Our philosophy has been refined by combining the unique insights of different investment greats

Value versus growth, systematic versus judgemental, active versus passive, bottom-up versus macro. We believe that one can learn important lessons from various successful investors who have applied quite different investment philosophies. We are not dogmatic in our approach and seek to continually learn from a wide array of investment greats. We attempt to follow their example where we share their belief in their philosophy but discard those ideas which might have worked only due to a confluence of circumstances, rather than having a robust theoretical and practical foundation. An important assumption imbedded in Protea Capital Management’s investment philosophy is that, over time, a company’s share price will converge with its value, with the value defined as the current best estimate of the net present value of the aggregate future cash flows that the company will generate.
Some of the most important insights we have learned from others

Warren Buffett – Buy great business rather than cigar butts, always limit your downside, take a long-term view.

Charlie Munger – Have a multi-disciplinary approach, look for lollapaloozas, collect mental models.

George Soros – Identify reflexivity (price-value loops), manage risk relative to probabilities, control fear & greed.

Jim Rogers – Always be curious, read widely, work hard, be ‘street-smart’, have a global mindset.

Ray Dalio – Understand the economic machine, use principles & algorithms for decisions, be radically self- critical.

Joel Greenblatt – Combine cheapness & quality (Low valuation but high ROIC), exploit special situations and arbitrage opportunities.

Jim Simons – Automate, look for predictive patterns in data, follow a systematic approach, adapt when necessary.

Sir John Templeton – Reject dogma, be intellectually humble, diversify geographically, create a quiet space to think.

Peter Lynch – Kick the tyres, be alert to opportunity at all times, stick with winning businesses, using a graph of the price versus value is very useful.

Philip Fisher – Use scuttlebutt (non-traditional sources of information), seek long-term compounders, back quality management teams.

Seth Klarman – Seek non-linear situations and only invest with a margin of safety (either lose a little or win a lot).

David Dreman – Be aware of market psychology and biases, determine consensus expectations discounted in the price, think differently/contrarian.

Michael Steinhardt – You need a variant perception, always question yourself, look at the portfolio without anchoring.

Clifford Asness – Focus on the factors that drive value, combine value & momentum, be academically rigorous.

Our philosophy is the foundation for our ‘Quantamental’ investment analysis process, where we combine qualitative fundamental analysis with quantitative analysis techniques:

Qualitative processes/inputs

Read, read & read – Newspapers, business publications, analyst reports, annual reports, company regulatory filings, investigative websites. Our number one daily activity is reading.

Assess the Management team – Consider the people involved: their background, aptitude, attitude, shareholder- orientation, logic, reason, drive, strategic thinking, capital allocation skills, risk appetite, incentives, ambition and authenticity.

Know the product/service and where it fits within the economic ecology – Analyse competitors, suppliers, customers, threats, opportunities (Michael Porter’s 5-forces) and assess the ‘moat’ of the business.

Scuttlebutt & mosaic theory – Seek opinions far and wide (especially strong opposing opinions) and connect the dots / fill the gaps through abductive reasoning where you cannot know for sure.

Be aware of psychological biases – Use common sense and don’t fool yourself, know that you don’t know everything and that you have mental blind spots. Always apply scepticism, including towards your own assumptions.

Think – Have time and space that is conducive for thinking deeply and clearly, get in the ‘flow’. Apply second- level thinking and figure out how you can be wrong. Always stay intellectually humble.

Quantitative processes/inputs

Financial Data – We have an automated process to obtain full historical financial statements of the individual company being analysed and arrange the data in a template financial valuation model file. We adjust/correct the data if necessary.

Use of algorithms – Every company valuation model automatically forecasts each line item of the financials for the next few years, using proprietary statistical techniques to create a base case future set of financials.

Du Pont / Gordon Growth model application – We ’translate’ the forecasted future financials into fair value using robust valuation principles, discounting future cashflows at the appropriate discount rate.

Assess outcome/fit – The model’s fair value output includes a historical graph of the price versus the value of the company, allowing us to evaluate past ‘fit’ and reasonability of the model’s future projections.

Toggle variables – We adjust certain model variables depending on our assessment of the probabilities implied by the model output and other sources of information. The future is never an exact extrapolation of the past.

Rank – All the companies we analyse are ranked according to various valuation metrics to compare expected returns in real-time as prices and other variables change. This is the ‘menu’ we use to choose our portfolio holdings from.

Portfolio construction

Long portfolio construction – We construct the Long side of our portfolios by buying shares in great businesses when they trade significantly below our assessment of intrinsic value, and therefore have a high expected return. We tend to hold on to these shares for the long-term, constantly assessing if the business is still great and if the management team is continuing to create value.

Short portfolio construction – We construct the Short side of our portfolios by selling (shorting) shares of mediocre companies when they trade significantly above our assessment of intrinsic value. In this regard, we are always on the lookout for unrealistic over-optimism, for management teams who destroy shareholder value (whether by intent, negligence or ineptitude) and for companies who run into debt problems.

Risk Management – We are acutely aware of the fact that the future is inherently uncertain, and therefore maintain a high level of diversification in our portfolios. We monitor our portfolios for concentration risk to various factors and we have individual position limits, which are independently monitored. We invest our own wealth into our funds, incentivising us to act responsibly and with a high duty of care.

Special Situations – We take advantage of special situations such as merger arbitrage, spin-offs, activist campaigns and other examples of opportunities with attractive expected returns from value-unlock catalysts.

ESG Considerations – Environmental, Social and Governance issues are considered on both the Long and the Short side of the portfolio. We have found companies lacking in this regard to be particularly attractive Short candidates.

“If I have seen further it is only by standing on the shoulders of giants.”
– Isaac Newton