Louis Wilson Fund

1
Louis Wilson Fund

• Review of Strategy and Philosophy

2
Investment Criteria

• Excellent Management and Strong Business
  Franchise
• Evidence of Growing Markets and/or Market Share
• Low Market/Book Value and High Growth/PE ratio
  (Lynch ratio)

3
Investment Criteria (cont.)

• High ROE, ROA and profit margins demonstrated
  consistent earning power
• Low risk measures and strong financial condition
• Growing companies in growing industries

4
Focus on Companies That

• Are well-managed, well-financed and display good
  fundamentals
• Are simple to understand, analyze and value
• Are undervalued relative to their prospects

5
Why This Approach for the Wilson Fund?

• Encourages focus on long-term investing, not
  trading or speculating
• This approach is best suited to the strengths and
  limitations of a student-run fund

6
What are our Strengths?

• We can focus on the long long-term
• We can ignore the noise of short-term
  distractions
• We can concentrate on a limited number of ideas
• We can hold cash if there are no fat pitches
• We only need a few good ideas to generate
  significant results

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And Limitations?

• Significant lag time between idea generation and
  implementation
• Limited number/types of companies we can
  understand better than industry experts.
• Infrequent trading/rebalancing
• Cant beat analysts at short-term earnings
  projections
• Dont have constant monitoring
• Cant trade actively

8
Limit yourself to an investment universe that
capitalizes on your strengths and isnt hindered
by your limitations, i.e.

• High quality businesses (consistent, predictable,
  high margin, high return)
• Low risk (risk of permanent loss, not volatility)
• Long-term investment horizon
• Sustainable competitive advantages

9
What is Excellent Management?

• Compensation package, executive ownership Are
  interests aligned?
• Annual report - Honest and straightforward?
• Look at record of wealth creation on a per share
  basis
• Look at capital allocation decisions dividends,
  buybacks, acquisitions, etc.
• Wealth-building or empire-building?

10
What is a quality business?

• Consistent and predictable earnings
• Healthy profit margins above industry avg.
• Stable or growing, consistently high ROIC
• Some sort of economic moat sustainable
  competitive advantage
• Non-commodity, non-cyclical
• Lots of value added to units of production, not
  easily duplicated.

11
What is a sustainable competitive advantage?

• Think about 5-forces analysis what is
  competitive position vs. suppliers, customers,
  etc. Who needs who?
• Can be low-cost provider or highly differentiated
  product or service
• Advantage can be structural, the result of patent
  protection, or simply superior culture and
  management.

12
Process

• First, identify companies that meet your
  qualitative requirements,
• Then, attempt to value them,
• Finally, recommend purchase only on those that
  are undervalued.

13
Portfolio Selection

• Universe of attractive businesses 100 or so
  stocks
• Focus list to evaluate 25 50 stocks
• Portfolio 12 or so companies

14
Funds to follow

• Sequoia Fund
• Janus Focused Value Fund
• Torray Fund
• Mosaic Funds
• The Fairholme Fund