Mavos Capital Investment Strategy and Philosophy Introduction

Most investors fish where all of the other fishermen are; Mavos Capital prefers to fish where the fish are.

Sep 05, 2023

Introduction

As a quick intro to the fund, Mavos was a name that we came up with as an ode to our company mascot and my best friend, Maverick my English Black Lab. We could not use Maverick Capital so we had to get creative and settled on Mavos.

In this post I am going to introduce the investment strategy Mavos Capital uses when evaluating capital allocation decisions. In subsequent posts, I will go into more detail on the strategy. Before that, I think it is very important to learn about Mavos Capital’s investment philosophy. That way you can understand the way we execute the strategy in conjunction with the way we think. A key theme that will be seen throughout these posts is that we focus on opportunities that are overlooked, ignored or otherwise not explored by other investors.

A fishing anecdote

If you imagine you are a fisherman and your whole business is based on finding the very best fish, no matter the volume, where do you think the best place is to look for said very best fish?

In an area where there are countless boats in the sea where you cannot even maneuver your vessel due to the sheer volume of fishing boats in the area. They all kind of look the same and they take the same path out to sea, have very similar fishing techniques and take a similar path home. Where your fishing boat is no different than the fishing boat next to you. On top of that, imagine you see a few commercial fishing boats that have nets so big you think they are fishing for blue whales. Every single fishing vessel you see is going after the same types of fish as you and everyone else. How in the world are you supposed to find the best fish this way?
You spend your time researching and you find a few areas that take a little longer to find, might be a little harder to get to, might take a little more time to get there, you might have to deal with a few more waves to get there but you are determined and you are willing to put in the time and hard work. You know this area offers the very best fish and if it is your job to find the best fish, who cares if it is a little bit more difficult? When you get there, the lightbulb clicks and you say to yourself “why have I been following the crowd and the ‘expert’ fishermen all these years? This is fish heaven!” You try and figure out why all the fishermen from example one are not coming here. It isn’t like you have some inside info that no one else has. By putting in a little extra work and research, everyone can find this place. But very few other fishermen do, you rarely see other fishing vessels there. Your friends keep asking you the same question — if there are such great fish there, why doesn’t everyone go fishing there vs the popular areas dominated by the commercial fishing vessels.

I think you now can guess which of these fishing areas we would prefer to fish in. There are many reasons why so many people choose option 1. Option 2 takes extra work, it is a more complex process to find the fish, for all the great fishing areas you discover, you find a lot of duds and you might spend a lot of time researching that area just to discover it is not a great option — but the fish you find in the great areas massively outweigh any duds you discover. These reasons (and many others) all deter most fishermen from exploring option 2 and why they stick to option 1 even if they know they will likely produce average results at best. Mavos Fishing Co, however, revels in the opportunity to explore these otherwise unexplored areas of the sea.

Ok enough about fishermen. Replace fishermen with stock pickers and replace fish with stocks and you catch my drift. Why do so many investors look for stocks where everyone else is looking versus putting in extra work and finding the best opportunities? That is a question people have been asking for 100s of years. Maybe even as far back as May 17th, 1792 when the Buttonwood Agreement was signed essentially founding the NYSE.

My goal is not to so much answer this age old question but rather to take advantage of this discrepancy. This was a long answer to introducing the main theme that runs deep through all of Mavos Capital’s investment strategies. I know I said enough about fishermen but one last time; we are focused on fishing where the very best fish are (no matter how much work is involved in getting there) versus the accepted practice of fishing where the other fishermen are.

Introducing Cognitive Biases and how they relate to investing

It is an accepted belief in all aspects of society that going with the crowd is the preferred, and sometimes falsely assumed, safer option. I remember when I was selling software many years ago, the company I was at had, by far, the best product on the market. However, we still struggled in many instances to compete against Microsoft even though they had a clearly inferior product. We were still looked at as a start-up and therefore a “riskier” decision. I established a great relationship with the CIO of a large software company while I was selling to him. Eventually they bought our software, replacing Microsoft in the process. When I asked him why he thought it was so tough for us to replace Microsoft in many companies, even though our product was objectively superior, he reminded me of the old saying “Nobody gets fired for buying IBM” and he said Microsoft is the IBM in this scenario. This was fascinating to me; people would consciously choose an inferior product just because they felt “safer” doing what everyone else was doing!

One thing I have always been incredibly fascinated with in is cognitive biases. The most interesting aspect about them to me is that no matter who you are and no matter how aware you are of these biases, you are subject to them. Sure, there are some people that can dampen the effects of certain biases by being aware and looking out for the signs of them but no one is immune.

Charlie Munger gave a speech to the Harvard students in 1995 that led to (after some tweaking) the release of “The Psychology of Human Misjudgment” — linked here. Another great read on the topic is “Influence” by Robert Cialdini.

Important cognitive biases explained

This post is not intended to be about cognitive biases so I will only spend a bit more time on the topic but there are a few that really have shaped by investment philosophy and I want to highlight them. Some of the cognitive biases that I find most interesting regarding investing are as follows:

Groupthink: I think this one is probably the most important bias in almost every aspect of life, business, investing, politics, etc. Pretty much everything in the earlier anecdote about fishing is related to Groupthink or “going with the crowd”. Human beings inately feel safer when their fellow humans are all doing the same thing. They may suspect, or even worse know, that what they are doing is inferior to other choices but they feel safer doing what everyone else is doing. A good example of this as it relates to investing is looking at analyst reports, especially for some of the more “blue chip” mega cap stocks. Sure they might have different reasons why but for the most part they have a roughly similar price target. I will use AAPL as an example — as of this writing in August 2023, there are 45 analysts that cover the stock and the average divergence over all 45 analysts is a ~6% difference in their price targets with an average of ~$200. That means that essentially all of these analysts have a roughly similar price target with a barely noticeable difference. No one is going to get in trouble for providing a price target right around the average of $200. But if analyst ABC come out with a $300 price target and the stock falls to $150 or if analyst ABC comes out with a $100 price target and the stock rises to $250, they will be questioned. But if everyone has a $200 price target and the stock falls to $150, it is “ok” because, hey, everyone was wrong not just analyst ABC! In conclusion, groupthink (and not just with analyst reports but overall buying and selling based on charts and past performance) causes people to feel more comfortable going with the crowd and this often leads to irrational valuations for stocks being offered by the marketplace. Both on the upside and downside and this is where Mavos Capital will take advantage of these scenarios.
Anchoring: the importance of anchoring is tied to Groupthink. Most people will see the analyst report seeing AAPL as being worth $200 and that is now the anchor in their mind. No matter how much research and modeling and analysis most people do, once they are anchored to $200, it will be hard to venture too far from that path and they will think wow this stock might be undervalued since I can buy it for $180 today and it is worth $200! Take another investor for example, they do the work and model and analyze AAPL and they come up with a price target closer to $100. In their mind they then see the stock at $180 and analyst targets at $200 and they think to themselves, wow, this is overvalued! Too many investors are in the former camp where they will anchor themselves to a stock price or analyst target before doing any work to determine an actual value. This again leads to a large discrepancy in the short-term market pricing of stocks, especially ones with lower liquidity and/or lower market caps, an area Mavos Capital lives in.
Confirmation Bias: It is hard for me to decide which is the most poisonous bias between Confirmation Bias and Groupthink. The two are typically interconnected; participants subscribing to Groupthink will then find confirming “evidence” that they are making the right decision (Confirmation Bias). Many investors, from retail all the way up to investors with the best track records of all time fall victim to Confirmation Bias. Especially in today’s world where every algorithm for every website whether it is social media or news etc will try to bombard you with what they think you want to see. This leads to most in society only seeing things that accentuate their confirmation bias. This is something I will admit that I have to consciously make an effort to counteract, especially when it comes to investing. Before making an investment, I will try to come up with a compelling “bear case” to my thesis. Meaning for a business I like and want to buy, I will come up with a compelling reason to NOT buy it. That way I am not just looking for evidence that backs up my bull thesis. If I still have strong conviction in a company even after “pitching myself” on the opposite side of the argument, I feel I have an even stronger thesis that way and can better analyze developments moving forward after having a view of the company from many different angles.
A few others I think are important but will list and not go into great detail on them
1. Gambler’s Fallacy: this stock has been going down so much, it has to go up! (For no fundamental reason other than just because it is going down)
2. Authority Bias: that analyst gets paid to write an analyst report and determine a price target, they must know what they are talking about!
3. Blind Spot Bias: “I know most people suffer from Confirmation Bias and Groupthink but there is no way I would ever fall victim to those!” (Someone who has a blind spot and thinks they’re immune to cognitive biases
4. Status Quo Bias: humans, along with all objects in the universe, like when things stay the same. It is a founding law of physics that something in motion will stay in motion unless disturbed. This is also part of Groupthink but most people will not change their mind; even if this changing of your mind will either get you out of a bad situation before it gets worse, or dissuade you from a good opportunity before it gets better.

Mavos Capital Investment Philosophy summarized

You are reading this and are thinking to yourself, ok this is great info and I appreciate it but I came here to learn about Mavos Capital’s strategy…I know I know and I am getting there but I think this background info is important to understand how and why I think the way I do.

The key principles I look for when evaluating a company for a long-term investment are:

A business I can understand: there are many great businesses out there and there will be investments that I miss but that is ok. One of the best ways for me to allocate capital with the greatest chance of capital appreciation is to be an expert in each and every investment I make. If I do not understand a company and/or industry, I cannot be an expert in that investment. And that is ok. Anyone that tries to be an expert in everything ends up having blind spots and making mistakes. This is not to say that I will never make a mistake. But by focusing on businesses and industries I can be an expert in, I am able to reduce the probability of mistakes greatly and protect as much as possible against downside risk. If you, an LP, calls me and asks why we are in “XYZ” investment, I want to be able to give a better answer than something along the lines of “it is a great company trading for a cheap multiple with good growth prospects”. You are essentially asking: why is it a great company, why is it trading for a cheap multiple, why does it have good growth prospects, etc and if I cannot answer those questions, Mavos should not be invested in that company.
Competitive advantage: this is typically evidenced by higher margins and more pricing power. I like to call it having a wide moat which you will see in my research reports (I did not coin the term moat but it portrays the idea I am trying to get across in the best and most concise way). Investing in companies with deep moats reduces the downside risk of an investment and allows us to keep our capital invested in this business over a long time horizon.
Great management teams: at the end of the day, when you buy a company’s stock, you are trusting the management team to successfully use that capital to make the business better thus leading to capital appreciation. Being able to evaluate a management team is a skill that many investors either overlook or do not spend the time to improve on. Many great investment opportunities have been squandered due to incompetent or dishonest management teams. Therefore, investing in companies with great management teams reduces the downside risk of an investment.
Purchasing a security at a great price (Margin of Safety): there are many great companies out there but sometimes this greatness comes with a high price tag. While great investments are typically a byproduct of great companies, just investing in a great company with the above attributes (a company I can understand, a competitive advantage and a great management team) does not necessarily mean it will be a great investment. This comes down to price and building in a margin of safety when making a buy decision. Example from further up in the post. Company ABC is worth $100 but it is being offered at $50, that is a 50% margin of safety. Due to unforeseen and unavoidable problems that pop up, stocks flucuatte often, especially in the short-term. Having a wide margin of safety helps to protect the downside risk of an investment. In this example, even if my calculated $100 is off by 30% and the stock really is only worth $70, buying it at $50 is still a good decision (40% price appreciation). Looking a the same stock that I calculated to have a value of $100 but is actually trading for $90, sure that is still “undervalued” but there is not much margin of safety. Let’s say the true value was actually $85, if I bought it for $90 that is a losing trade.

Always protecting the downside

A lot of this discussion has centered more around Mavos Capital’s investment philosophy, rather than investment strategy. Strategy is very important but it is important to understand the philosophy behind this strategy. As you can tell from the above attributes, Mavos Capital is always trying to protect the downside risk. This is not to say we do not like taking risk. However risk should be taken in a calculated manner and understanding why this risk is present and why we feel comfortable taking this risk.

Monitoring downside risk and being a steward of partners’ capital are foundational pillars that Mavos Capital will always stand on. These bullet points are straight from our website:

When you invest your capital with any outside manager, you are bestowing an enormous amount of trust into this manager that they are an agent acting in your best interest. Above all else, that is their duty as a manager.
When you invest your capital with Mavos Capital, we take that one step further. Your portfolio manager has essentially all of his liquid capital invested along side you. This is true today and this will be true for as long as Mavos Capital exists. At the end of the day, we will treat your capital with as much care and respect as our own.
To greatly simplify our thought process: to create above average returns over a long time horizon, you must not only think about the upside potential but just as, if not more, importantly you must concern yourself with the downside risk. This is not to say we shy away from risk but rather that we make sure we understand the full picture of an investment (both the upside potential and the downside risk) before committing capital to an opportunity.
We are not looking to be the home run hitter that also leads the league in strikeouts.

Briefly introducing strategy, with more to come

So now that I have gone through the investment philosophy in a lot of detail, I will intro the investment strategy. As discussed in the intro, this will be more focused on just introducing the strategy and then subsequent posts will discuss it in much more detail. There are three key buckets that I put potential investments into:

Dark Horses
Sustainers
Event Driven

Within each of these buckets there are subcategories that further define an investment’s unique characteristics. Within “Dark Horses”, we have Hidden Assets and Misunderstood subcategories. Within “Sustainers”, we have Must Have and Roll-up subcategories. While many of these themes intertwine, they each have their own unique characteristics.

Beneath the several dozen companies that dominate the financial media and investor attention, there are thousands of wonderful business that are insufficiently researched, ripe with opportunity for high returns on capital invested. That is the world that Mavos Capital lives in; where the fish are.

Conclusion

Thank you for reading this lengthy post. I think it is vital to have a detailed view of the way your investment manager thinks to help better understand the way your investment manager executes a strategy. In all my conversations and all my blog posts, I try to discuss and explain everything I would personally want to know and learn if I were to be evaluating an investment manager for my own capital. Like discussed above, I invest along my partners in the fund and essentially all of my net worth is invested in the partnership; and that will continue for as long as this fund exists, which I plan to be well past the days where I can get senior discounts at the movie theater. Therefore, I am not just giving lip service to the care I give to successfully managing your capital; the proof is in the pudding as they say.

While this post focused more on the philosophy and very briefly introduced the strategy, subsequent posts will focus exclusively on the strategy in more detail with examples to help further your understanding. As always, please reach out to me with any questions, comments, concerns, etc.

Cheers,

Ryan

Mavos Capital