Marshfield’s approach is consensus-based and highly disciplined, with the objective always being to understand what makes a company and its industry tick. Our 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.
While our process is designed to achieve consensus, our Portfolio Managers stand ready to break any impasses that might occur. Our approach emphasizes the potential long-term health of a company rather than generic “consensus” stocks or a focus on the short-term performance of a company. We perform a bottom-up analysis to identify companies that we believe have sustainable competitive advantages, good management, a resilient and appropriate culture, strong returns across a cycle, and the potential for stock price appreciation as a consequence of those characteristics. 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 relevant materials (news and 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 an initial 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, to limit exposure, or when extreme overvaluation occurs.