We interviewed up-and-coming value investor Charles Hoeveler and are pleased to share Charles’ insights into wide-moat investing.
Charles founded Norwood Capital Partners in San Francisco in 2010. Norwood manages a concentrated, fundamental value-based long/short fund. The firm relies on primary research to build a portfolio of dominant businesses trading at a discount to intrinsic value. Charles has fifteen years of experience in institutional asset management. He holds a BA in Economics from Stanford.
MOI Global: Please tell us a bit about your background. How did you get started in value investing and what motivated you to start your own firm, Norwood Capital Partners?
Charles Hoeveler: My father is an entrepreneur and my mother is a calculus teacher, so I had the dual benefit from a young age of a knack for numbers and the understanding of what makes businesses succeed and fail. I was born and raised in Marin County with the subtle influence of some truly great investors. These three influences focused my career vision on investing early in life.
I attended Stanford University from 1994 to 1998, and was a four-year letter winner/NCAA team champion in tennis. The focus and competitiveness I developed to keep up in daily practice helps drive me today. Tennis is an activity that teaches independence and transparency – you are alone on the court and outcomes are binary. Tennis is also a sport that requires patience and confidence… the notion of reducing unforced errors – by the way, there are no “forced” errors in a patient, long-term investment strategy – has been ingrained in me and this translates directly into my style of investing. For all of these reasons, I think tennis prepared me well to start and manage a fund on my own (note: Bijel Doshi joined Norwood as an investment professional in January 2014).
Munger’s ‘Psychology of Human Misjudgment’ taught me the value of understanding both incentives and basic human biases.
Ironically, my first exposure to buy-side investing was in 2001/2002 when I was working for Deutsche Bank but would spend my free time with a small hedge fund built on the William O’Neill philosophy. Incorporating numerous charts, technical and momentum trading on both sides of the portfolio didn’t resonate with me.
From 2003-2009, I was a research analyst at Nicholas Applegate and Lazard Asset Management investing for two products: a diversified long-only small cap value product, and a much smaller fundamental value long/short fund
Working under Portfolio Manager Mark Stuckelman taught me the importance of free cash flow valuation, particularly through various business cycles. I also started to build a database of companies I had thoroughly researched both long and short.
From 2009-2010, I worked with a private equity veteran to launch a public equity investment vehicle focused on concentrated, long-term investing with an activist component. It was a nearly impossible time to launch this product, but the experience was intense, and I left with a deep appreciation for the value of primary research – generating unique qualitative insights about businesses and industries from the experts (management teams and industry veterans).
Around the same time, I started voraciously reading everything possible about value investing. Cunningham’s collation of Buffett’s annual letters taught me how to evaluate business quality and the importance of management execution. Munger’s Psychology of Human Misjudgment taught me the value of understanding incentives and basic human biases. The underlying Norwood investment philosophy is a combination of all of the above experiences. There are four founding tenets: 1) Primary research based on my private equity experience, 2) Value investing based on free cash flow analysis, 3) Concentrated portfolio as a natural extension of the conviction that results from our primary research effort, and 4) Time horizon arbitrage to capitalize on the irrationality of short-term thinking. I understood from my experience that these characteristics were not top of mind for most institutional portfolio managers given short-term incentives. I thought there was a substantial opportunity to invest with the above founding tenets, and with the support and encouragement of my mentors, I launched the Fund in June 2011.
MOI: How would you describe your underlying investment philosophy?
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