Broyhill Letter Highlights IV: Downside Protection

This is the fourth piece in our Broyhill Letter Highlight series, highlighting our thoughts on downside protection over the years.  You can access other posts in the series here.

For those who would like to revisit our letters in full, we will also be gradually sharing them to our Research Studio throughout the series.

IV: Downside Protection

One of the most underappreciated keys to generating consistent long-term returns is to minimize losses. Losses are almost always caused by taking too much risk. If you avoid large losses, the gains will usually take care of themselves.

Successful investing requires a heavy emphasis on avoiding mistakes because protecting capital through challenging times is inconsistent with maximizing returns in good times. The key to capitalizing on periods of market turbulence is coming through with your capital and your judgment intact, while most participants are paralyzed by fear and losses.

Capital preservation has always been our primary focus. While traditional approaches to investment management (either implicitly or explicitly) accept the fact that they will periodically see their net worth cut in half, we just don’t find that acceptable.

We never stop thinking about risk. We revamp, refine, and reexamine our thinking every day in order to maximize our odds of success. There is no silver bullet. We must make decisions without the comfort of perfect information. The best we can do is assess all the relevant factors through all the relevant lenses, and as always, we strive to make the best decisions for our clients with the information we have.

At Broyhill, we are programmed to stay on our feet and to ensure our investors do the same. We prioritize the return of capital before pursuing a return on capital. This means being prudent when others are not, which positions us to take calculated risks when others cannot. It means we prefer the steady pace of the tortoise rather than risk burning out like the hare. It can be frustrating to watch those rabbits recklessly speed ahead while we move forward at a more measured and calculated pace. But we believe this is the best way to ensure we finish the race with our investors (and their capital) still on board.

We manage money for investors who have worked hard to build their net worth. We work equally hard to keep it by ensuring we have a deep understanding of every business we own. Sometimes we get it right. Other times we don't. But we don't buy stock because someone on the internet said we should. The work is always our own. Not a hot tip poached through a message board.

It's only when the tide goes out that you learn who's been swimming naked. Despite day traders' propensity for skinny-dipping, our preference remains in line with other veteran investors and in keeping our pants on.

The best trailing five-year records late in the game are usually generated with an equivalent amount of risk by fully invested and unhedged heroes. There are no guarantees in this business, but it’s safe to assume that this approach will greatly increase the probability that the next wave down takes your pants and your capital with it. Keeping our pants on is the cornerstone of our strategy at Broyhill.

Bad investors are destroyed by crises, good investors survive them, and great investors are improved by them.