What We Do

In 1997, the principals of Steamboat Investment Advisors (“SIA”) formed an investment partnership named the Steamboat Investment LP (“SILP”). Our investment beliefs have been formed over these past ten plus years and we have created a Partner Guide for SILP over the years.

While SIA manages individual accounts instead of a pool of money within SILP, our philosophy is that we view our investors within SIA as our partners. Our investment philosophy is best described through the following edited excerpts from our Partner Guide.

Partner related business principles

Our Attitude is one of partnership.

We expect our investors to consider their investment as a long-term wealth building business. Do not expect short-term results. Our time frame for judging performance of our businesses is 5, 7, and 10 years, or longer - not next year. You should judge us based on capital appreciation over the long term.

Our goal is to maximize YOUR average rate of return on a long term basis and provide for the preservation of principal.

Benjamin Graham (thought by many to be one of the founding fathers of security analysis) once said, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." As Warren Buffett so aptly summarized, “investing is most successful when it is most businesslike.

Therefore, we believe it is essential for SIA to have a guiding investment philosophy. Fortunately, we have found a set of investment principles that have stood the test of time and proved to offer superior results. We have Warren Buffett, Charlie Munger, Philip Fisher, and Ben Graham (whose investment track records speak for themselves) to thank for their contribution to the field of investing and, in turn, for the development of SIA’s philosophies which are as follows:

We operate SIA following two primary rules, taken from Warren Buffett:
Rule Number 1: Don't lose money
Rule Number 2: Don't forget Rule Number 1
We will focus on buying businesses, not stocks. Our focus is on finding valuable, successful businesses. We must understand the business, it must have a consistent operating history, it must have favorable long-term prospects, its managers must acknowledge its obligation to create value for its shareholders, and it must have a management team that is dedicated (in word and deed) to the prosperity of the business.
We will buy these businesses when the market offers us the ability to purchase shares at a discount to the true value of the business. This will provide a margin of safety for our investment and preserve our capital. We believe in the maxim, “protect the downside and the upside will take care of itself.” To satisfy our margin of safety requirement we attempt to purchase investments for 50% of their true worth. By paying 50% of what we believe something to be worth we believe we significantly reduce the probability of permanent loss of capital. The question then becomes – how do we determine the true worth of an investment?

Every business has two values. One, the value based on the quoted stock price and two, the intrinsic value of the company. The market value of a business enterprise (enterprise value) is simply the most recently quoted stock price multiplied by the number of shares outstanding plus the amount of outstanding net debt. In essence, the operational value of the business based on a quote from a broker. Intrinsic value, on the other hand, is the underlying value today of the stream of future income or cash flow available to the owners or, alternatively, what a knowledgeable buyer would pay for the entire business in an arm’s length transaction. We seek to buy businesses at a discount to this intrinsic value. Stated another way, we buy when the quoted market price of enterprise value is approximately 50% of the intrinsic value of the enterprise. Often times these companies are identified by low ratios of price-to-earnings, price-to-book value, and price-to-sales, or high dividend yields. It is our firm belief that the market is quite often inefficient in the short term. Thus, when the market “wakes up” to our businesses, the intrinsic value, or more, will be realized.

Application of these principles has historically produced superior results and safety of principal as documented in academic studies of historical stock market performance. We would be happy to provide a more detailed discussion of these investment principles and the corresponding empirical studies if you so desire.

WE DON'T FOLLOW THE CROWD IN DEVELOPING OUR INVESTMENT APPROACH.

Independent thinking is a valuable commodity. There are many investment “rules of thumb” that we are sure you have heard before. “Don’t put all your eggs in one basket”, “you never go broke taking profits”, etc. While these sound good in theory on a first pass, the independent investor, thinking critically about creating wealth, challenges conventional wisdom. And we will do that in the Partnership. Specifically,

We will manage a small portfolio of great businesses. We seek to understand each business and determine what makes that business successful. We will not concern ourselves with owning hundreds of businesses or being diversified. While diversification in the grand scheme of your overall financial picture makes sense (cash, real estate, fixed income, etc.) that is not the role that Steamboat fulfills.
As it pertains to our role in managing your account for long term equity returns, we don’t subscribe to the popular or common theories regarding diversification. In fact, in the unabridged “Steamboat Dictionary” diversification is defined as “a process that neuters out-performance or compels one to mediocrity.” See also “di–worse–ified.” To us it makes little sense to buy our 500th favorite business if we can own more of our #1 favorite at a favorable price. We will focus strictly on owning great businesses and if we only find twenty great businesses then that is all that we will own.

We will minimize turnover. Simply put, we don’t like transaction costs or taxes, and we would prefer to spend our time making a few very correct decisions as opposed to many mediocre decisions. We will patiently hold an investment, even if there are temporary problems, as long as the business is experiencing increases in its intrinsic value and the potential return remains attractive compared to other alternatives. We are cognizant of the benefits of long-term gains and will seek to maximize those benefits to your advantage. Further, keeping turnover to a minimum enhances the powerful impact of compounding returns by deferring the tax liability on gains into the future.

We will “turn off” the stock market. We believe the stock market often responds primarily to emotion in the short term, however in the long run responds to fundamentals or logic. We will not concern ourselves with the daily fluctuations of the market as a whole

In general, we will not worry about the “nits and nats” of the economy. Every day we hear market commentators talking about the next blip in interest rates, unemployment, housing starts, the trade balance, etc. and how the market reacted. Talk about information overload! First of all, the last we checked, nobody has been able to predict these variables over the long term with any meaningful degree of accuracy in the past and we do not expect this to change in the future. Second, we think that short-term changes in these variables have little to no effect on the long-term business prospects of the companies we own.

Our strategy is to own businesses.

If we had our way, we would purchase entire companies. We have high standards and high expectations for the businesses we desire to own. Our focus is on finding publicly traded investments in high quality businesses that reflect the following characteristics

The business must be run by owners and managers who pride themselves on corporate governance; this ensures the company’s reputation.

The owners and managers must continually search and eliminate every dollar of capital invested in low return activities – activities that do not lead to sustainable cash flow – and divert it into activities that have high returns. If there are no activities offering high returns, the capital should be sent back to the shareholders in the form of dividends, share repurchases, or the sale of the business.

The company must have a defining competitive advantage, or protective moat, that separates it from the competition. This can be observed through evidence of being the low-cost producer, having a dominant market share, among others.

The company must have a consistent operating history through a variety of economic cycles. Efficiency must be an operative word at every company we own.

Management must recognize and respond to changes that affect their product, customers and employees. Management must portray a clear vision or convey a unique personality that drives the success and reputation of the company.

We will not concern ourselves with the highflying or beauty pageant stocks of the day. Our objective is to seek outstanding companies that are currently selling at attractive prices. Once found, we will buy aggressively. When the market does go down we do not panic. Rather, you can be assured that we are busy and excited at the prospect of finding many opportunities or adding to our existing holdings.

We will deal honestly with you and report to you on a scheduled basis. We will not oversell expectations, and we will tell you if we have less than competitive results.

We will be candid in our reporting to you, emphasizing the positives and negatives important in assessing the performance of the partnership and the businesses that we own. We pay a great amount of attention to our businesses and we will inform you as to their prospects. At the same time, information is a competitive edge. Therefore, as it relates primarily to publicly traded companies, we will not disclose our specific positions. However, our reports may contain broad comments if we determine it would not put us at a competitive disadvantage. Simply put, we will tell you the facts that we would want to know if our respective positions were reversed.

Our communications with you will be as informative as possible. You will receive monthly statements. While we don’t necessarily endorse monthly reporting as we believe it fosters short term thinking (and frankly we don’t concern ourselves with monthly fluctuations in our holdings), we understand that some feel more comfortable receiving something monthly. Lastly, we are available on an individual basis, at any time, to answer any questions you have.

We expect mutually beneficial relationship based on a clear understanding of our goals.

We will manage your account to maximize your return. We will monitor our options at all times and take appropriate action to maximize YOUR return, not our fees.

Further, we will be selective in choosing our partners. We will not accept a partner who seeks short-term results. Nor will we accept a partner who does not understand our philosophy and agree to be bound by its principles. Lastly, we will not accept a partner who is hesitant about our operations. We intend to be focused strictly on the job at hand – earning outstanding returns – and not be concerned about excessive hand holding. We expect these criteria to screen out a number of people. That is fine in our book. We want all oars pulling in the same direction.

CONCLUSION

Steamboat Investment Advisors, LLC is an organization that strives for continual improvement. We bring together skills from diverse backgrounds that, when combined, are greater than the mere sum of the talents. We believe we have performed well weathering the storms over the past few years. The internet/telecom bubble and ultimate collapse solidified our philosophy as we refused to fall prey to the “popularity of the masses.” We stick to what we know – a business-like approach to investing.

We will continue to build on our past experience. We believe our strong fundamental skills in business valuation, banking, and corporate finance, and our advanced educational backgrounds gives us a broad perspective and the ability to see the strengths and weaknesses of the businesses we consider purchasing. Perhaps most importantly, each of us has a healthy amount of built-in skepticism, which forces us to challenge each of our decisions. We will make no snap decisions.

What do we seek from you? Simply an acknowledgement that you understand our philosophy and agree in principle with our approach. You must understand that our approach is more than just a way to sort through stocks; it is a philosophy of wealth building and wealth management. Like all good philosophies, we will enjoy its rewards and we will seek comfort in it when times are tough. We will strictly adhere to our philosophies and they will regulate every aspect of our investment process.

For those who entrust us, we will use our intellectual and analytical horsepower and sound judgment to the best of our ability. When we make mistakes, we will learn and not repeat. We realize above all else that you have put us in a position of trust. We will honor that position and manage the Partnership to exceed your expectations.

We thank you for your interest and look forward to being your partner in this profitable endeavor.

A recommended reading list of books, newsletters, and websites that we have found very enjoyable and thought we'd share them with you:

Steamboat Investment Advisors, LLC is a Colorado and Michigan Registered Investment Advisor firm. All content contained within should not be construed by any consumer and/or any prospective client as a solicitation to effect, or attempt to effect transactions in securities or the rendering of investment advice.