We invest bottom-up but worry in every direction.
The members of our research team work collaboratively and, as a group, constitute Marshfield’s Portfolio Manager. This ensures that each client account is the recipient of our best collective thinking.
Our approach is consensus-based and highly disciplined, with the objective always being to understand what makes a company and its industry tick. The group process facilitates idea generation, allows for the application of a consistent investment philosophy, supports critical thinking, and encourages the flushing out of flaws in the investment thesis. We are skeptical, trained to air potential risks and to identify our own biases, and eager to understand the truth, whether that leads to buying a stock or consigning it to the scrapheap.
Integral to our process is the development of a “shopping list” of companies that we would buy at a designated price. This allows for good decisions to be made while under stress, as unless the fundamental investment thesis has changed, we are ready and willing to take action even in the face of chaotic external events.
The cornerstones of Marshfield’s process are:
• Rigorous analysis, which entails developing a full understanding of the ecosystem in which the company exists. We read all relevant materials (journal articles, securities filings, etc.) about the company and its industry, talk extensively to management of both the subject company and that of its competitors, and conduct research into the economics underlying the industry. This often means talking to suppliers, customers, and regulators in order to arrive at a deep understanding of how the business works.
• Synthesis, in which we refine our theory of the company based upon our analysis, determine whether we need any additional information, and submit our conceptual case to unsparing critical review.
• Valuation of the company (free cash flow and/or book value, depending upon how cyclical the business is and how dependent on book value earnings are) is conducted collectively and using conservative assumptions. We stress test our valuation based upon a series of different scenarios, and set a target buy price that incorporates a substantial margin of safety.
• Continuous review of all holdings requires ongoing monitoring of the financial performance of each portfolio company as well as analysis of whether each company is executing as our conceptual case would suggest.
• Sales occur when we’ve made a mistake, when the fundamentals change, or when extreme overvaluation occurs.