Objective

Our objective is to avoid the permanent loss of capital while maximizing the increase in long-term, after-tax purchasing power of our funds. Put another way, we aim to build an indestructible long-term compounding machine.

Investments

We approach investments as if we are buying 100% of a private business. We aim to buy all investments for less than half of our conservative estimate of intrinsic value in five years. Our holding period may be longer than five years for compounders and shorter for special situations. We make three types of investments:

1. Compounders

   • Reinvestment Moat — Businesses with a demonstrated and enduring competitive advantage that can reinvest meaningful amounts of capital at high rates of return into their core business.

   • Legacy Moat + “Outsider” Management — Businesses with a demonstrated and enduring competitive advantage that cannot reinvest capital internally. Managers use opportunistic capital allocation (acquisitions, special dividends, and stock buybacks) to invest at high rates of return outside of the core business.

2. Legacy Moat + Returning Capital — Businesses with a demonstrated and enduring competitive advantage that cannot reinvest meaningful amounts of capital internally. Managers return excess capital to shareholders through predictable dividends and consistent stock repurchases.

3. Special Situations — Businesses which are undervalued due to corporate actions (e.g. spinoffs, carve-outs, restructuring, acquisitions) rather then business fundamentals. We focus on opportunities which offer a highly asymmetric risk/reward profile (“heads I win, tails I don’t lose much”).

Principles

Our strategy is developed and implemented using the following principles as guidelines:

• Think independently.

• Invest with a margin of safety.

• Make fewer, better, decisions.

• Act like long-term business owners.

• Fish where the fish are.

• Profit from patience.

Think Independently

We approach each stock as if we are on its board of directors. We narrow our focus to the handful of key factors that will have an outsized impact on future earnings. If we can’t identify the key factors we put it into the “too hard” pile and move on.

Next, we assign ourselves the story. We act like an investigative journalist to uncover durable insights about the key variables we’ve identified. We focus on primary information sources — S.E.C. filings, conference call transcripts, trade journals, newspapers, and people who work in the industry.

Invest With A Margin Of Safety

A margin of safety is the difference between the price we pay and the intrinsic value of what we’ve bought. Buying a business for less than it’s worth leaves room for inevitable errors. We never want to buy a business priced for perfection. Our goal is to avoid losing money even when we’re wrong.

Make Fewer, Better, Decisions

Ted Williams retired with a 0.344 batting average, 521 home runs, and a 0.482 on-base percentage, the highest of all time. In The Science Of Hitting he explained his method: he carved the strike zone into 77 cells, each the size of a baseball, and refused to swing except when the ball was in his most favorable cells.

Investing, unlike baseball, has no called strikes. Each day the stock market throws us a pitch that we’re free to let sail past us. We prefer to buy and sell sparingly and only when valuations are at extremes. That is, we wait for the fat pitch — the “no-brainer” decisions.

Since “no -brainers” are hard to come by, we do not diversify excessively. We prefer to concentrate our capital into our best ideas rather than spread among many mediocre ones.

Act Like Long Term Business Owners

As owners, we focus on the fundamentals of the business and do not obsess over price fluctuations. When possible, we use periods of unjustified pessimism to purchase high quality companies at attractive prices. The stock market’s volatility is our friend, not our foe.

In The Long-Run You Own A Business, Not A Stock

Fish Where The Fish Are

Certain areas of the market offer higher base rates of success than others. For example, multiple studies have shown that spinoffs, on average, outperform the S&P 500. We prefer to fish in stocked ponds.

We also like to fish where others cannot. We make the most of our small size and broad mandate by analyzing stocks off the beaten path that larger institutions can’t or won’t invest in. Examples include small and micro cap stocks, stocks with low float, stocks that trade over-the-counter, and businesses undergoing corporate transactions or restructurings.

Profit From Patience

If everything you do needs to work on a three-year time horizon, then you're competing against a lot of people. But if you're willing to invest on a seven-year time horizon, you're now competing against a fraction of those people.

Jeff Bezos, Amazon

Over one year, changes in sentiment dwarf changes in fundamentals. But over five or ten years changes in sentiment average out and a stock’s price tracks the business’s performance.

We don’t know how to predict changes in sentiment. That’s not our game. We do think we can judge a business’s future returns on invested capital (at least sometimes, with a lot of work).

Our ability to patiently ignore price fluctuations while focusing on fundamentals is our most valuable competitive advantage.

We Do Not Predict The Stock Market

We are not in the business of predicting the general stock market or business fluctuations. If you think we can do this or you think it is essential to an investment program you should not be a client of Eagle Point Capital.

We Cannot Guarantee Results To Clients

What we can and do promise is that:

• Our investments will be chosen on the basis of value, not popularity;

• We will attempt to bring risk of permanent capital loss (not short term marked-to-market loss) to an absolute minimum by obtaining a wide margin of safety in each investment; and

• Our team has virtually their entire net worth invested alongside Eagle Point clients. We eat our own cooking.