Member’s manual

This Pechere Investments member’s manual has been widely inspired by Warren Buffet’s 1996 owner’s manual that still sets the rules for Berkshire Hathaway Corporation since. Of course rules has been tailored (and simplified) to our current relatively limited available capital and to my personal convictions. But the quintessence remains: considering Pechere Investments preeminently as a vehicle for our upcoming investments. 9 very simple rules resume my investment philosophy and the way I manage Pechere Investments since inception.

1. Pechere Investments is a conduit through which our members own the assets. Although Pechere Investments form is Limited Liability Company, my attitude is partnership. I think of Pechere Investments members as owner-members, and of myself as managing member. Because of the size of my ownership (which won’t fall under 50 %), I am also, for better or worse, controlling member.

2. I measure our success by the long-term progress on a 5 years basis of the companies we partly own, rather than by the month-to-month movements of their stocks. In fact, I would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies. If I have good long-term expectations, short-term price changes are meaningless for me except to the extent they offer us an opportunity to increase our ownership at an attractive price.

3. I eat my own cooking. The major portion (except real estate, which is not liquid asset) of my net worth is invested in the company. I have more than 98% of my liquid net worth in Pechere Investments ownership. I feel totally comfortable with this eggs-in-one-basket situation because Pechere Investments itself intends to own a wide variety of extraordinary businesses. I cannot promise you result. But I can guarantee that your financial fortunes will move in lockstep with mine for whatever period of time you elect to be my partner. I have no interest in large salary or other means of gaining an “edge” over you. I want to make money only when my partners do and in exactly the same proportion. Moreover, when I do a mistake, I want you to know that my financial suffering is proportional to yours.

4. My long-term economic goal is to maximize Pechere Investments’ average annual rate of gain in intrinsic business value on a per-share basis. I do not measure the economic significance or performance of Pechere Investments by its size; I measure by per-share progress. I don’t know if the rate of per-share progress will increase or diminish in the future. But I will be disappointed if this rate does not exceed that of the average large European and American corporation.

5. A plummeting market is very good news for us. Pechere Investments and its long-term members benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices. My preference would be to reach my goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital. My second choice is to own parts of similar businesses. The challenge for me is to generate ideas as rapidly as I generate cash. In this respect, a depressed stock market is likely to present me with significant advantages. For one thing, it tends to reduce the prices at which entire companies become available for purchase. And second, some of the wonderful businesses Pechere Investments partly own are consistent buyers of their own shares, which mean that they, and we, gain from the cheaper prices at which they can buy.

6. I never play around with the scorecard. My guideline is to tell you the business facts that I would want to know if our positions were reversed. I will be as candid in informing you about my mistakes as I am in describing the happier experiences, emphasizing the pluses and minuses important in appraising business value. I believe in telling you how I think so that you can evaluate not only Pechere Investments’ businesses but also assess my approach to management and capital allocation. Because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. I, both as owner and manager, virtually ignore such consolidated numbers. However, I will also report to you the earnings of each new business purchased, numbers I consider of great importance. These figures, along with other information I will supply about the individual businesses, should generally aid you in making judgments about them.

7. I want to finish the race. As American racecar champion Rick Mears said: “To finish first, you must first finish.” I use debt sparingly and, when I do borrow, I attempt to structure our loans on a long-term fixed-rate basis. I will reject interesting opportunities rather than over-leverage our balance sheet. This conservatism may sometimes penalize our results but it is the only behavior that leaves me comfortable, considering the members who intend to commit large portions of their net worth to my care. I won’t sacrifice a good night’s sleep for a shot at a few extra percentage points of return. When I make a large purchase, as I did with Goldman Sachs, I will borrow money with the intent of quickly paying it back, as I actually did.

8. I keep a “do first, explain later” communication policy. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are. The very skilled specialists I have the honor to work with are bound to professional secrecy as I am. I will be communicating with you in a one and only way: through the annual report. I will try to give all members as much value- defining information as can be conveyed in a document kept to reasonable length. Maybe in the future, I will organize an informal Annual Meeting, at which I will be delighted to answer questions about our company.

9. I am a value investor. I believe that the only logical approach to evaluating the relative attractiveness of investments and businesses is intrinsic value. It can be defined simply: the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple and fluctuates over the years. My effort will ensure to find and evaluate very good businesses 1/ I understand (I can estimate business model and intrinsic value with a reasonable precision) 2/ offering a sustainable and durable competitive advantage 3/ directed by a management with integrity and talent 4/ at a bargain price (offering a safety margin between value and price over 40%).

Denis Pechere, Managing member.