Two key inefficiencies in modern markets are the short-termism of most of the participants in them, and the tendency of many investors to hug indices. We believe that those who can take a medium and long-term view and disregard index composition are at an advantage: they will be less a slave to momentum, and more inclined to buy shares when they are cheap.

OP tries to keep its distance from the frenzy of much of the City and Wall Street, where it is difficult to ignore the short-term. The firm is small, private, and quiet. OP has no information edge and must make commonsensical judgements. We are free from committeeitis. We focus on valuations, not on predictions. We regard a share whose price has gone down as, prima facie, cheaper and more interesting. We believe that markets tend to extrapolate unduly so that expectations reflected in share prices become too low after a run of bad news and too high after a run of good news. This tendency is magnified by the prevalence of momentum investing.

In putting together a portfolio, we start with a blank sheet of paper. We do not use index weightings as a starting point. We have a broad principle of diversification, but with a concentrated portfolio of around 20 holdings (and a maximum size of holding of 10% of the portfolio). Our decision-making is overwhelmingly a matter of stock selection. Sector and country weightings are side-effects of the stock selection. We make no asset allocation decisions in equity portfolios: they are essentially fully invested in equities. We do no shorting and use no leverage.

Our portfolios are for equity investors – for the part (or a portion of that part) of their portfolios which clients want to put in equities in the belief that equities are likely to provide a decent return above inflation over the long run, though with a lot of volatility so that every investor needs plenty of cushion of comfort elsewhere. When equities are bad, we will be bad too, although we hope then to be less bad than markets as a whole. When equities are good, we will look good, and hope to do better than markets. In every company in which we invest, we always look for at least a 25% plausible return over the next 2-3 years; but the reality is that, being fully invested in equities, our portfolios will be bludgeoned or burnished by whatever equity markets generally do. In the long run, however, we aim to produce a return better than the relevant equity markets, and if equities do indeed produce a return well above inflation, then that result should be satisfactory.