We find it fascinating that some investors conflate active investing with activity.
Active management doesn't mean high levels of activity, but rather understanding how to allocate capital, which means there are many times that not only by being very selective you are choosing not to invest in many opportunities, but also when opportunities present themselves, you act on them in a very decisive manner because you're well-prepared based on all the long term research that we have done.
There's no question that we have significant concentration in the market today with Magnificent 7. What's interesting to us is that one important thing that investors need to note is, historically, investors coined these terms about companies, whether it be FAANG, or MAMAA, or four horsemen, or NIFTY 50 it's important to note that what drives success, we believe, is not investing based on these themes, but rather being very selective and understanding the differences among these groupings, and choose those companies that you want to invest based on quality, growth, and valuation.
It's important to note also that for Mag 7, for example, it's not just if you own them today, but how you own them over time. When we analyze the last two decades, what you find is for these Mag 7 companies, for example, only less than 1% of the managers held them continuously.
So it's not a matter of if you invested in one of these seven companies today, but also what you have done in the past. And rather than grouping all these companies into one basket, we would rather understand the differences in terms of quality, growth, and valuation, and act accordingly.
We are long-term, patient investors. And we strategically allocate capital to select high quality businesses with sustainable growth only when they trade at a significant discount to our estimate of intrinsic value. And let me define those three key drivers; quality, growth, and valuation. In terms of quality, for us, a high quality business simply means a business that will be very difficult to be replicated by someone else if they had time and capital. Because empirical evidence shows us that more than 99% of the time, whatever that business is doing can be replicated by someone else. So what we are seeking is this truly rare businesses-- again, less than 1% of the businesses out there, we believe-- that have some very unique characteristics where it makes it virtually impossible or very difficult to replicate what that business is doing. And therefore, these businesses tend to have time as their friend, meaning as time passes, their competitive advantages become stronger, and therefore it becomes even more difficult to compete with these businesses.
Once we are convinced that a business is high quality, then we focus on growth. For us, growth needs to be both profitable and sustainable. And we define growth as cash flow growth. And what we are seeking is businesses that can sustain their long-term growth beyond a decade or so. Last but not least, we focus on valuation. It's important to note you cannot value a business without knowing its quality and without knowing its growth characteristics. And we want to invest in those businesses only when they trade at a significant discount to our estimate of intrinsic value. We believe only less than 1% of the businesses out there can meet our quality and growth characteristics. And therefore, we make very selective, patient decisions where we typically make one or two buy decisions in a given calendar year.
