Tortuga Capital seeks stocks selling at prices that are significantly less than our estimate of “intrinsic value”, which we define as the value that an informed buyer would pay for the entire enterprise. This investment approach is often referred to as “value investing”, and was first formulated by Benjamin Graham and David Dodd in their seminal 1934 book Security Analysis.
Identifying Mispriced Securities
We view stocks as pro-rata shares in corporate enterprises and not as pieces of paper to be traded back and forth. Our investment approach is predicated on the observation that security prices are often substantially above or below underlying business values, and that the market tends to correct this mispricing over time. A diligent investor who can identify such mispricing and patiently wait for market participants to recognize the value of such securities, can greatly increase the probability of attractive long-term investment returns without taking on substantial incremental risk.
We believe that pricing inefficiencies can occur in financial markets for a variety of psychological and institutional reasons. Examples of such psychological and institutional causes of security mispricing include overreaction to short-term earnings declines or institutional selling of a company’s spun-off division or subsidiary. We purchase securities only when we thoroughly understand the business and can identify why a security has been significantly mispriced in the market.
We employ a number of methods to determine the value of businesses, including discounted cash flows, comparable market valuations, and net asset values. We use conservative assumptions in each valuation model to come up with a range of values, with a particular emphasis on the valuations arising from relatively pessimistic business assumptions.
We conduct our company due-diligence based on a variety of sources including annual report filings, proxy filings, earnings call transcripts, industry research, and communication with the company, its customers, suppliers and key competitors. We invest only when we believe that we have a thorough understanding of a company.
Our portfolios are concentrated in 8 to 12 stocks which we have identified as having prices of less than 60% of our intrinsic value estimates (at the time of purchase). We manage our buy and sell decisions at the portfolio level by constantly monitoring the weighted-average price-to-value ratio, selling holdings when they have appreciated and better bargains are available or when our analysis changes. We seek diversification by finding companies whose underlying businesses should perform differently from that of other portfolio holdings in different economic environments.
Our overall investment philosophy stands in contrast with the “modern finance theory” approach to security selection, which emphasizes efficient capital markets, statistical measures of risk, and variance minimization.