Arcadia Capital Group Investment Philosophy
Arcadia Capital believes knowledge, patience, and a long-term perspective are the critical factors to investment success. An investor should understand as much as possible about any given investment, gathering information from multiple sources and perspectives, and developing a conviction based on substance and knowledge of all critical forces impacting value before making an investment.
Arcadia has developed this investment process, and it allows us to find unusual investment opportunities, regardless of market conditions. These opportunities are typically not obvious or generally recognized in the financial press or by analysts because, we believe, too many other investors find comfort in consensus. While generally accepted assumptions and popular investment ideas may give comfort, it does not produce superior investment returns. Arcadia pursues specific investment ideas, exploring assumptions and developing investment theses, and then tries to understand the sector, industry, and market context for any potential investment. This is the cornerstone of our investment strategy.
Arcadia also focuses on interpersonal skills. We value our partners, clients, company management, as well as other employees, irrespective of rank. We try to avoid boastful arrogance, which, while being offensive in and of itself, leads to poor thinking and analysis, and delivers bad investment decisions.
We are also highly indebted to the successful investors who have mentored us, and academics, who helped us form our investment approach toward specific security selection, and outlook on the overall capital markets. As an example, while Arcadia typically invests in early-stage companies with risky technologies in highly volatile markets, we also rely on an investment foundation that includes a central concept in the Graham-Dodd model called “margin of safety.” This highlights the discipline of walking away from an investment if, after deep scrutiny, the opportunity does not offer an attractive return and a reasonable margin for error. For example, Arcadia disregards any investment that will not ultimately generate sufficient cash flow giving us an appropriate return with a reasonable margin of safety. We do not buy into the hype. Eventually, the music stops, and Arcadia does not wish to be left looking for a greater fool.
We believe there is a tendency for most investment managers to focus on the wrong performance measures. This creates an extremely negative effect, which we call the “Performance Derby.” Venture capitalists, mutual funds and institutional investors that have succumbed to the Performance Derby mentality focus on comparative performance in lieu of absolute performance. This popular obsession with how an investment fund performs relative to the broader market (say to the S&P 500 index) leads to avoidable risk-taking, and the consequent (and sometimes irreversible) loss of capital.
This phenomenon exists because many investors focus on the latest fad, short-term thinking, and outperformance of the market on a weekly, monthly, quarterly or annual basis. They sacrifice the potential for higher returns in the long-term while, most importantly, assuming unnecessary risk today and, all too often, jump into overcrowded and overhyped sectors that will never produce adequate returns. In the public markets, this perspective causes firms to have the propensity to sell investments that are good buys, and buy stocks that have performed well, but are overpriced, for fear of missing the momentum their peers are enjoying. These misguided trades, on the other hand, supply Arcadia with attractive opportunities.
Further, the frenetic trading of these stocks adds volatility and risk to them, thereby making the managers’ portfolios riskier than the overall market. It is a vicious cycle: The more their stocks fluctuate, the higher the degree of risk, and vice-versa. While the typical fund manager (encouraged, perhaps, by the typical client) might justify this risk as necessary volatility to achieve higher returns, Arcadia believes this is misguided. Risk constitutes two simple components: the probability of loss, and the potential amount of loss. Additionally, the most important goal of any investor should be to avoid or minimize risk and only then focus on returns – not the other way around. Essentially, Arcadia Capital focuses on capital preservation first, and we do not let that principle be overridden by excitement about potential gains.
Precisely because of this maddening chase for high short-term returns, Arcadia Capital must respond with even more discipline and patience. We are not hesitant to be patient until we find investments with high enough potential return with an adequate margin of safety.
Instead of chasing the latest sector blindly, whether it is artificial intelligence, gene editing, personalized medicine, machine learning, web-based services or other assets or sectors that may be interesting at the moment, Arcadia waits for realistic plans from qualified managers or existing companies valued at a level that we are comfortable paying because we have calculated an appropriate long-term value.
Investments focus on technologies and life sciences. Our selections are focused, and information is gathered from multiple sources and perspectives, along with our industry experience and network of experts. This provides a better perspective and enables a truer insight into any investment’s intrinsic value. Arcadia focuses on individual companies and invests in opportunities that we believe can create substantial value. While the sectors where we focus our investing are risky and volatile, we do our best to understand overall industry conditions, the general economy, and other macro factors. We do not gamble on whether a particular market sector, the economy or the market, is heading in a particular direction in the short term. The psychology of short-term investing, dominating the markets, causes many companies to be overvalued, only to be overcorrected in the future, or undervalued assets that stay cheap for a long period of time. Ultimately though, in each situation, the real value will emerge. But it takes time, and this creates nervousness in an investor: falling securities prices trigger the tendency to trade out of them in fear that the prices may plunge further, and rising prices tend to cause investors to pile in without much thought. A true investor, then, has to also circumvent these human emotions – fear and greed drive price movements and create opportunities. This is why Arcadia strives to stay focused and disciplined in its investment choices.
Most investment mistakes are not when investors buy securities, but when they sell. Far too often it is great investments that are sold too soon that because The return was attractive (even though much greater returns were yet to be captured). This is also driven by the “performance Derby” we referred to earlier. This misguided approach leads to the most substantial “losses” because so much potential profit is left on the table. A more accurate understanding of a company and its competitive position within an attractive market enables investors to capture the true long-term value.
Therefore, it is important and challenging to overcome greed and anxiety. Greed motivates jumping on the bandwagon of the latest investment fad, anxiety to not miss that fad since it appears to produce such initial attractive returns. In the meantime, great opportunities, such as mispriced assets, overly discounted distressed securities, and other similar investments, that require patience, and a long-term perspective are ignored.
Arcadia Capital’s investment strategy has proven to produce superior returns over a substantial period of time, avoiding unnecessary risk, and patiently waiting for the most attractive opportunities. Arcadia will not pursue short-term gains and, therefore, sacrifice long-term wealth. Money is made when the crop is planted, not when it’s harvested.
Arcadia Capital relies on close relationships with our companies, advisors and experts to develop a more unique approach to our investments. This gives us the confidence to pursue our strategy of buying what others are selling, identifying the most undervalued opportunities, and aggressively pursuing the most attractive investments. Our firm’s strategy only really works if our partners are aligned with us. We work as a team to identify unique and unprecedented asset mispricing.
Given the constraints of time, we do not try to look for every opportunity that is available. Arcadia focuses on a select few investments that meet our strict criteria. We spend significant time sourcing opportunities, and getting investment perspective, from our extensive network of industry contacts and experts. We try to focus quickly on where there are investment opportunities, and we do not waste our time trying to keep up with short-term developments, or companies that manage themselves for quarterly earnings. Arcadia tries to quickly capture situations where there is a combination of very attractive elements – a great management team focused on a unique opportunity with the ability to create and sustain a competitive advantage within an extremely attractive industry sector.
Arcadia helps create potential catalysts for value creation. This can range from new strategic partnerships, new product introductions, management changes, and other significant developments. While these events may trigger the creation of value, they take planning, coordination, and patience. However, we constantly re-evaluate the situation to assess whether or not the catalyst we have identified is actually creating the value we expect. Arcadia continuously reassesses any investment in light of new information that becomes available, especially when the degree of uncertainty is high.
Current markets have created an unprecedented level of uncertainty. Investment selection must be even more thorough and cautious. While Arcadia believes opportunities to create great value exist, overall market conditions cannot be ignored. Market directions and macro issues will impact returns and heighten volatility. The economic and political climate has made investing more complex than ever. This is our new normal, and we must react appropriately to it with caution, thoroughness and multiple perspectives. We look for sustainable competitive advantage in all of our investments, and Arcadia must also be sustainable in its investment strategy. Arcadia believes that it’s investing approach, and disciplined process, are critical to any success in these circumstances.