Level 3 — Outsized ReturnsPAIDThe individual shares I buy, and why

The approach is borrowed, and I’m happy to admit it. It’s close to how Warren Buffett, the most successful investor in the world, has invested for more than sixty years: buy a good company when it’s going cheap, and wait.

So what does “a good company going cheap” actually mean? We look for businesses with a long record of growing earnings and free cash flow — often over decades — that have, for one reason or another, fallen badly out of favour. The share price has dropped a long way from its highs on the back of some past event. But the business itself is already recovering. Earnings are turning back up. The price hasn’t caught up yet.

Then we look for a catalyst — a specific reason the gap between the price and the value is about to close. New management, a restructuring, a turn in the cycle, a market that’s about to notice what we’ve already noticed.

And there’s a hard rule underneath all of it. The position has to have a realistic shot at doubling or trebling over two to three years. If it can’t get there, I’m not interested. The whole point of this part of the portfolio is excess returns — not the 10% the market already hands you.

We’re not chasing the next big thing. We’re buying good companies the market has temporarily given up on, and getting paid when it changes its mind.

The investment thesis for each of these stocks can be seen here.