No Shortcuts—In Mountain Climbing or Investing

I recently read a fascinating book, No Shortcuts to the Top, by legendary mountain climber Ed Viesturs. In mountain climbing, one of the greatest achievements is to climb the 8000 meter plus peaks–only 14 of them globally–and Ed is the only American to have climbed all 14 without any supplemental oxygen.

As I read the book, I couldn’t help but make associations to what we do as intrinsic value investors. Mountain climbing requires patience. It requires risk management. It requires an understanding of the marginal benefit of the next step relative to the risks ahead. Ed shared a beautiful philosophy on mountain climbing in the book: Getting to the top of any mountain is optional but returning home safely is mandatory. This is exactly how I think about investing–higher returns are optional but protecting capital is mandatory.

Nearly everything Ed shared about mountain climbing made me think about financial markets. With every step, one must evaluate the level of risk and respond more conservatively at times even when your emotions are telling you to complete the climb. After Ed would evaluate the weather, how healthy his team was and the state of the equipment, there were times when he had to make the difficult decision to turn back in the very last leg of a climb. Sometimes that decision came after an excruciating three-week climb. Making the decision to turn back, knowing that he’d have nothing to show for his efforts–that’s risk management. Ed stated, “You're not there to conquer the mountain, you're there to accept, understand it, and be humble, because only then will you have a chance of ever reaching the top.” I feel the same way about investing.

Our investment philosophy is simple–buy good businesses that we can understand and don’t pay too much. Why is this important? Because with good businesses that we can understand, we can do the work necessary to develop a view two, three or five years out. We can reasonably predict a company’s cash flows over that period and value those cash flows so that we have a fair estimate of what that business is worth. Estimating intrinsic value enables us to know when to buy companies–and we always aim to buy them when they’re on sale.

Diageo, the largest spirits company in the world, is a good example. Diageo owns well-known brands such as Johnnie Walker, Smirnoff, Captain Morgan and Don Julio. Is Diageo a business that we can say with confidence we believe will be around in five years? Of course. Can we predict how many cases of Johnnie Walker they will sell next year? With a reasonable level of confidence, yes. Can we estimate the value of the business? Most definitely. In other words, to us, Diageo represents a good business that we can understand.

From time to time, the market becomes overly focused on near-term headwinds rather than the long-term value of a business. This happened to Diageo a few years ago when the company faced some challenges. Its US vodka sales were down, the Indian government decided to regulate liquor store locations, thereby hampering Diageo’s expansion plans, and sales in Scotland had taken a hit. That was enough for market participants to bid its share price lower–low enough that it became a buy candidate under our investment philosophy. We had the opportunity to invest and own a great business at a discount to what we believed the business was worth.

As I reflect on the past five years that we’ve managed the international strategy here at Diamond Hill, there have been a lot of interesting times–the seesaw of growth vs. value, the Trump presidency and all its headlines, the pandemic and subsequent recovery. We’ve learned more and reinforced our beliefs about risk management, the value of patience, and sound decision making, especially when we’re facing a steep climb ahead of us.