Rule No 1: Never Lose Money, Rule No 2: Never Forget Rule No. 1 - Warren Buffett
AVI PERFORMANCE
Sample Client Letter
Companies in our portfolios have to pass a stringent Quality, Valuation and Growth (QVG) test: Quality - companies don’t operate in a competitive vacuum. Even the most successful will stumble at some point. Where the strong (quality) get up and regroup to move forward, weaker ones may not. These are the characteristics that define high quality companies:
•	Sustainable Competitive Advantages – a deep moat around a business
•	Predictable Earnings – propelled by recurring revenues
•	Significant Free Cash Flows – lessens reliance on external financing, source of dividends, share buybacks
•	Management – we want honest, competent, long-term oriented and whose interest aligned with shareholders management to run companies we own
•	High Return on Capital - far exceeding the cost of capital, scorecard for value creation
•	Strong Balance Sheets – lean towards companies that underutilize debt.
•	(Free cash flows + high return on capital = internal financing of growth = little debt)
Valuation - Multi prong valuation approach, we try to figure the business “fair” value from different angles:
•	Discounted Cash Flow Analysis – project future cash flows and discount them back
•	Absolute Valuation – proprietary absolute valuation model based on expected earnings growth rate, business and financial risks and earnings visibility
•	Relative Valuation – look at historical valuations i.e. price to earnings, price to operating cash flows, price to book value etc...
Margin of safety – requirement will depend on expected earnings growth rate, dividend yield, business and financial risks and earnings visibility. Extremely important for two reasons:
•	Lowers risk
•	Source of returns
Growth – we look at growth from a perspective of fundamental return which is a combination of earnings growth and dividends:
•	Earnings growth is a crucial source of returns and decreases risk of our decisions as we get “paid” to wait through earnings growth and dividend payments.
•	Dividend paying stocks are preferred as they provide a stable source of income, lower risk and attest to quality of the business after dividends are paid with cash.
Striking an appropriate balance:
•	Too much breeds indifference
•	Too little increases risk and paralyzes decision making
Taking diversification a step further, stress testing a portfolio for probable risks coming to fruition is critical, as it exposes the weakness of the portfolio in the event probability turns into reality.
It is crucial to the success of the portfolio, introduces Darwinism to the portfolios – survival of fittest. We sell stocks when one of the following takes place:
•	Stock reaches our predetermined price (or valuation) target that is set at the time of purchase.
•	Fundamentals (expected return or risk profile) change.
We monitor our stocks on a consistent basis and are a proactive seller. If a company that shows signs of deterioration in the fundamentals it is put on a “double secret probation”.