Flexible Value Portfolio
Search across styles and balance multiple sources of undervaluation
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 96%
This approach defines value as the present value of future free cash flows rather than as a low valuation multiple. It preserves maximum flexibility to search across attractively valued compounders, conventional value stocks, and younger businesses whose futures remain misunderstood. Each category supplies a different return profile: compounders can build value for years, neglected mature companies can benefit from closing valuation gaps, and early-stage businesses can offer asymmetric outcomes. Combining these opportunity types also reduces dependence on one market regime. The investor must still demand undervaluation, but growth, cash generation, market expectations, and possible future outcomes all enter the assessment instead of relying on a mechanical value label.
Origin
Developed through Samantha McLemore's apprenticeship with Bill Miller and their work on the Opportunity Trust. Extracted from Masters in Business.
Core principles
- 01Value depends on future cash flows, not a low multiple alone
- 02Growth is an essential input to intrinsic value
- 03Flexibility expands the investable opportunity set
- 04Different opportunity types perform in different environments
- 05Young companies are often misunderstood
How to run it
- 1
Remove the style box
Search the full equity market rather than screening exclusively for low-multiple stocks. Treat any business as eligible if its price is below a reasonable estimate of intrinsic value.
Pro tip Use the mandate's widest permissible latitude before narrowing the opportunity set.
Watch out Flexibility must not become an excuse to buy popular companies without valuation discipline.
- 2
Value future cash flows
Estimate the present value of future free cash flows under plausible assumptions. Explicitly model growth because it can dominate long-term business value.
Pro tip Separate the quality of the business from the attractiveness of its current price.
Watch out Long-range growth assumptions can create false precision.
- 3
Classify the opportunity
Determine whether the candidate is an attractively valued compounder, a conventional value stock, or an early-life misunderstood business. Apply research appropriate to its uncertainty and maturity.
Pro tip Use the classification to identify the key evidence that could invalidate the thesis.
Watch out Do not assume every young company will compound or every cheap company will recover.
- 4
Build a mixed portfolio
Combine opportunity types that can respond differently to changing economic and market conditions. Preserve concentration in the strongest ideas without making the portfolio dependent on one style.
Pro tip Add cheaper or defensive names when richly valued growth holdings dominate portfolio risk.
Watch out Nominal diversification does not help when positions share the same underlying drivers.
- 5
Wait for gaps to close
Maintain positions while fundamentals support the thesis and the market remains below estimated value. Let time and business compounding produce the return.
Pro tip Reassess the thesis rather than reacting automatically to short-term price weakness.
Watch out Patience is harmful when deteriorating fundamentals have permanently reduced intrinsic value.
In the wild
The Opportunity strategy combined compounders such as Amazon and Alphabet with conventionally cheap companies such as Citigroup and General Motors. The categories offered different paths to appreciation instead of forcing every holding into a traditional low-multiple definition of value.
→ A portfolio capable of finding undervaluation across growth-led and value-led market environments.
When broad valuations were elevated, McLemore added significantly to healthcare, which had reached a fifty-year relative valuation low despite containing businesses with good returns on capital. The allocation supplied both valuation upside and defensive ballast.
→ Improved portfolio resilience without abandoning the search for undervaluation.
Common mistakes
Equating value with a low multiple
A low multiple can describe a declining business, while a high-quality compounder may still be undervalued relative to its future cash flows.
Concentrating in one opportunity type
Owning only richly valued growth companies or only neglected mature companies leaves the portfolio vulnerable to one market regime.
Treating flexibility as loosened discipline
A broad mandate still requires a defensible intrinsic-value estimate and a clear discount to that estimate.
Is it for you?
Best for
Long-term equity investors who can evaluate both established cash generators and uncertain growth opportunities.
Not ideal for
Investors constrained to a narrow style benchmark or unable to tolerate concentrated, unconventional holdings.
From the transcript
“the value of any business is the present value of the future free cash flows”
“why would you have a process where you explicitly exclude what you know are the best values in the market.”
“we like to have a mix, and I think that helps the fund do well in different environments.”
From the episode
Finding Value Investments with Patient Capital's Samantha McLemore