Ground Rules

1. 99% of your manager’s net-worth is invested in the same securities that the fund invests in. Your manager eats his own cooking.

2. Your manager seeks to avoid permanent losses, but not quotational losses. A security can trade at any price, hence price volatility can never be avoided. Your manager makes investments on price relative to the underlying business, never on price alone.

3. Your manager is risk-averse, but does not avoid risk. Risk is inversely related to the “discount” – difference between price and underlying business value. The greater the discount, the smaller the risk, the higher the returns. To be risk-averse is to look for large discounts that provide high returns for little risk.

4. To practice #3 is to minimize loss. The greater the discount, the bigger the cushion for a mistaken assessment of the underlying business, the lower the likelihood and degree of loss.

5. For #3 to hold, the assessment of business value must be accurate. Your manager prefers to understand the obvious than grasp the esoteric, and invests only in predictable businesses to maximize the likelihood of accurate assessments.

6. The assessment of business value must be made on an absolute, not relative, basis. The value of a business is measured by its fundamentals, not by its peers or the market.

7. Your manager is focused on outperforming standard stock indices over a 3-5 year horizon, but is unable to ascertain the precise degree and date of outperformance.

8. Your manager invests in 10 or fewer securities. Concentration of capital and thought offers the best chance for risk aversion and outperformance.

About FRC

Farm Road Capital seeks to compound capital over decades by investing in securities based on a risk-averse and absolute-value approach.

FRC is managed by Marcel Gozali.