The goal of the Ardor Partnership ("The Partnership") is to generate outsized returns for its investors by investing in businesses with a proven track record. Below we outline the core of our investment philosophy.
The Partnership invests in companies with results that are objectively measurable. Managing risk adequately should increase investors' wealth over time, not decrease it. The Partnership's philosophy is to reduce risk by avoiding speculative equity stories with unpredictable outcomes that often lead to permanent capital loss. Instead, the Partnership focuses on risk that can be measured, managed and leveraged.
Betting everything on a single horse in a race might pay off. Some people know better which horses to play on, but many just pay for the hope of winning a random gamble. The partnership will never participate in games where the probabilities are unknown or not favourably skewed. In investing, there are risks we know and understand. Such risks we can measure and plan for. Then there are risks we know exist but cannot fully quantify. These risks can easily be avoided with good discipline. Finally, the dangerous risks are the unknown unknowns; risks we do not even realize exist. These are by some referred to as "black swans". Unknown unknowns cannot be fully planned for. However, when they surface, the situation can be assessed, allowing the partnership to either seize an opportunity or walk away from a less favourable risk-reward situation. It is crucial that everyone who joins The Partnership fully understands this.
Not all companies with strong, measurable results are great investments. However, truly great investments always demonstrate strong, measurable results. Over time, the test of a great investment is whether those results are repeatable. For that to happen, the field of business the company operates in must be able to absorb the capital deployed supported by a growing demand for the product or service. This is easily quantifiable by the return on incremental invested capital in light of growing revenues. While historical ROIC figures are great at revealing a superior competitive position, the ROIIC figure explains whether the Moat is widening or narrowing. With a stable or widening Moat coupled with growing revenues, the only thing left to understand is the probability for a continuation.
The durability of a company's position is one of the most essential parts of investment risk assessment. A well grounded investment decision must consider all aspects. From dilution risk and management actions to the capital cycle, sector tailwinds, and substitution risk. Historical performance might present a static view of the business, unless the company has proven the ability to adapt to evolving environments. One should not underestimate the disruptive power free markets unleash against highly profitable companies. However, the best companies readjust to times and innovate throughout the business cycle adapting to customers' evolving demands.
The best investment returns come not from doing more, but from doing less. To hold a business for the long term is to allow the engine of compounding to work uninterrupted. It entails understanding that value is created not in days or quarters, but over years. Few market participants have the patience to play in this league. The Partnership intends to hold investments for the long term, allowing the underlying economics of quality businesses to compound with time as our greatest ally.
In investing, like in baseball, we don't have to swing at every pitch. Patience gives the upper hand. Then, when the right pitch comes, a business we truly understand at a price that makes sense, we must commit fully. Great investors, like great hitters, know that lasting success comes from selectivity, focus, and timing. Ardor's goal is to wait for those pitches we understand deeply, and when they come, swing the bat with confidence. Concentration is a natural extension of this thinking. If both unique businesses and deep insight into those are rare, when we find these cases, we ought to act decisively. Diversifying into dozens of lesser ideas does not reduce risk, rather it guarantees average outcomes. Concentration is not about betting big for the sake of bravado, it is about knowing when you have found something exceptional and giving it room to matter.
Valuation provides the lens through which that exceptional opportunity can be properly sized. The valuation process is more of an art than a science, a pointer to what is baked into the price. With realistic expectations, it is possible to understand whether a company is expensive, cheap or fairly priced, even if one applies a broad expectation range. However, it is important to note that valuation alone does not make a good investment. It is only a second order analysis that should be made after the business has been deemed of exceptional quality. Even if the current price appears too high, performing a valuation sets the groundwork for future opportunities, allowing us to recognize a more attractive entry point when it arises. Importantly, fair valuation is not a single number but a range, reflecting the uncertainty in assumptions and outcomes. Understanding this range is essential to evaluating the return profile, determining the annual performance required to justify the current price, and assessing whether a sufficient margin of safety exists, given the business's quality profile.
The structure of the Partnership is designed to be long-term, which is a fundamental condition for the strategy to work. Partners of The Partnership must believe in and operate with a long-term perspective. Else, the whole setup falls apart. This entails avoiding constantly checking market prices and comparing to what could have been achieved with an index fund. We are confident that long-term returns will outdo the broader market. Otherwise, there would be no point in The Partnership's existence. The market sometimes offers excellent businesses cheap for no apparent reason (that is perhaps exactly the reason: for no reason). When such times arrive, it would be a fool's game to benchmark our performance against such folly. These are exactly the types of benchmark games we do not want to participate in. We are content to walk the roundabout way, which requires patience, like all good things. Only after having walked that path to the end, it makes sense to compare our investment result to other reasonable alternatives.
Following the above reasoning, if someone intends to sell their stake in The Partnership within a certain number of years, the sale must be made to another buyer, as the partnership is not built for short-term exits. After five years, it is possible to sell, but not prior to that. We will not liquidate holdings in order to redeem shares, since the purpose of The Partnership is to put capital to productive use and increase shareholders' purchasing power, not to create liquidity.
The goal for the Partnership is to allocate capital that allows for a meaningful life for our partners. This is achieved by growing wealth over the long term by patiently investing in a small number of high-quality businesses we comprehend, only when the risks are clearly understood and the price makes sense.
I hope you can join us in our adventure.
Yours sincerely,
Arne Rubin and Andreas Danielsson
Winter 2025