To identify investment opportunities, we conduct comprehensive analyses of the secular trends in the business world. Our focus revolves around growing industries that redefine the way people live, work, and play. We carefully identify and allocate our capital to the most dominant businesses within these promising industries, intending to maintain long-term investments. Vigilant monitoring of our holdings allows us to swiftly respond to any signs of disappointing operating results, deteriorating future prospects, or weakening management teams, leading us to liquidate our investments when necessary.
As part of our commitment to exploring new opportunities, we continuously seek fresh investment opportunities. If we come across a truly promising business that surpasses any of our existing holdings, we raise capital for the new idea by selling our weakest company.
Our preference lies with capital-light businesses that exhibit high margins, robust free cash flow growth, and exceptional returns on capital at maturity. We also favor businesses generating recurring revenues or experiencing frequent and repeat customer purchases. With a concentrated portfolio typically comprising 15-20 carefully chosen companies, we ensure a focused approach to our investments.
Recognising the cyclical nature of the economy, we acknowledge that business expansions and bull markets are inevitably followed by economic contractions (recessions) and bear markets. Historical evidence demonstrates that economic downturns often coincide with significant stock market declines.
To tackle volatility and safeguard our capital during stock market downtrends, we follow a systematic trend following hedging strategy which protects capital and mitigates our drawdowns. Additionally, should the stock market experience an excessive surge and become over-extended, we occasionally capture gains and increase cash holdings in our portfolio.
