An Overview of Carbon Capital

This post outlines how I make investment decisions at Carbon Capital.

It reflects years of following markets, studying great investors, reading extensively, and learning through experience, while knowing there is still far more to learn.

Investing has no endpoint. Businesses evolve, technologies reshape industries, and new founders constantly challenge what once looked obvious. That is the beauty, and the consequence, of capitalism. Layered on top are economic cycles of varying lengths, black swan events, geopolitics, and more. All of these forces combine to make one question enduringly difficult to answer: what comes next? The future is uncertain by nature.

This philosophy is my attempt to create structure around that uncertainty. It is not meant to predict the future or guarantee success. It exists to narrow focus, impose discipline, and prevent emotional decision-making. It pushes me toward businesses I understand, areas that genuinely interest me, and situations where I might have some edge. Just as importantly, it identifies where gaps in my knowledge may lead to disastrous decisions and serves as a reminder to stay away.

Many of these principles are not new. They are grounded primarily in the wisdom of Warren Buffett and Charlie Munger, with meaningful influence from Peter Lynch, Chris Hohn, Stanley Druckenmiller, and others. My philosophy will evolve, but the core principles should hold regardless of the environment.

I. Concentration and Number of Positions

If I am going to invest actively, concentration is necessary. The best investors concentrate in their highest-conviction ideas. Holding 20 or more stocks makes it extremely difficult to follow each business properly. Staying on top of competition, industry dynamics, earnings trends, and management decisions becomes nearly impossible at that scale. After roughly 15 positions, a portfolio’s standard deviation begins to approximate index-level volatility without the simplicity or cost efficiency of just owning the index. Active investing only makes sense if I am willing to focus deeply on a limited number of businesses with real intensity.

Warren Buffett’s level of conviction reflects decades of experience and an extraordinary understanding of businesses across nearly every industry. I am not there yet. Still, the principle holds. Most significant fortunes have been built on one or two core businesses, and looking at any list of the world's wealthiest, the pattern is obvious. Yet someone owning four private businesses is rarely called reckless, while owning four stocks often is. The difference is that stocks carry a price tag day-to-day, which creates noise. I intend to treat that noise as irrelevant and focus instead on earnings power and long-term business performance. Performance will be measured in years, not quarters.

Concentration without discipline, however, is just overconfidence dressed up. I have been investing for close to a decade, but I have not navigated a severe multi-year drawdown or a lost decade where markets went essentially nowhere. Since the Global Financial Crisis, markets have been relatively forgiving, broadly going up and to the right with corrections that rebounded quickly. That matters when thinking about how concentrated to be and when.

With that in mind, the target range is 6 to 15 businesses. In a bear market, lower-conviction names may be trimmed to concentrate further in the best ideas. However, at all times, a cash buffer of roughly 10% is ideal, enough to act when opportunities arise without sitting on the sidelines indefinitely.

II. Types of Businesses

The ideal business is simple to understand, has great unit economics, strong management, a durable competitive advantage, and robust long-term prospects in an industry with structural tailwinds. It should have pricing power, low capital intensity, a solid balance sheet, and disciplined capital allocation.

No business will check every box perfectly. Demanding more from each investment raises the bar, and a higher bar tends to produce better outcomes.

Above all, the business needs to consistently grow revenue. Research has shown that roughly three quarters of total shareholder return over a 10-year holding period came from revenue growth, not multiple expansion. That tells you where real value is created.

Expanding margins matter, but sustained sales growth has been the dominant driver of long-term stock performance. Organic growth through pricing power, domestic and international expansion, and new verticals is far preferable to growth built on aggressive M&A or financial engineering.

The central question to ask: will this business still be here and stronger in 10 years? That single filter eliminates most "disruptive" companies with exciting stories but massive uncertainty. There is no need to search for the next golden goose. The existing golden goose is almost always superior. In my experience, most companies marketed as disruptive have ultimately incinerated capital. There are exceptions, but they are rare.

There will be occasional opportunities where a name is so broadly cheap that the math points clearly to a reversion to fair value. These tend to be shorter-term positions, anywhere from six months to around three years, held until the thesis plays out. The goal is not to have many of these. The focus should remain on the most predictable, dominant businesses.

There are also sectors I will actively avoid: banks, airlines, the auto industry (with one company as an exception), utilities, and telecom. These share the same structural problems: heavy leverage, intense competition, capital intensity, weak or nonexistent moats, and regulation that suppresses long-term profit growth.

III. Holding Period

The goal is a long holding period, ideally five to ten years, with no hard ceiling.

Compounding requires time. With a concentrated portfolio, there is no reason for high turnover. Long holding periods reduce taxes, limit frictional costs, and keep the focus above the noise of short-term volatility and sentiment.

They also cushion mistakes. If I time my entry incorrectly and hold through a rough patch, the business is likely to recover and the position may eventually work. Permanent capital destruction is a far worse outcome than temporary underperformance.

Lynch captured both sides of this well:

"When you sell in desperation, you always sell cheap."

and

"If you're great in this business you're right six times out of ten."

A long holding period helps with both. It prevents panic selling at the worst moments, and it gives the right ideas the runway they need to compound into real returns.

Today's markets make this harder than it sounds. Because trading is frictionless and instantaneous, the temptation is constant and activity feels like progress. Average holding periods on the NYSE have collapsed from around seven years in the 1960s to under one year today. The result: the average investor tends to underperform not just the S&P 500, but inflation itself.

Discipline, patience, and a willingness to sit still are among the most powerful edges available to any investor. They are also the hardest to maintain. Moving in and out of positions constantly prevents the development of the gut sense, stomach, and intuition that leads to higher-quality decisions under pressure. Staying invested through the full range of market environments, including the difficult and disorienting ones, is where that judgment is actually built. It cannot be shortcut.

IV. Valuation

To value a business, I use a standard DCF with conservative growth estimates across bear, base, and bull cases. Historical figures serve as the anchor; analyst estimates are taken with skepticism and discounted further. The goal is always a conservative fair value driven by conservative growth rates, conservative terminal multiples, and a standard 10% discount rate.

This is not about building elaborate models for every segment and updated for every headline. That level of precision is practically impossible to get right and not the best use of time. The best opportunities should be clear enough that perfectly modeling every moving part is not required. A rough guideline is what matters, enough to confirm I am not significantly overpaying.

I will often also run a reverse DCF alongside the standard one, which Charlie Munger captured with his principle of "Invert. Always invert." A reverse DCF takes the current stock price and works backwards to reveal what growth assumptions are already baked in. The question then becomes simple: do I believe this business will outperform those assumptions over the next decade? That binary framing makes the decision cleaner.

In some cases, simple multiples are enough. If a business trades at 10x earnings and I expect the multiple to expand to 15x alongside 10% earnings growth, the math speaks for itself.

But the most important rule, regardless of how attractive the business looks, is to never overpay. Seth Klarman put it well:

A loss is not symmetrical. Lose 20% and the gain required just to break even is 25%. Lose 50% and it takes a full 100% gain to recover. Lose 70% and that number surges to 233%. The mathematics of loss compound aggressively in the wrong direction, which is why protecting the downside is the highest priority.

The goal is not to dramatically outperform during bull markets or chase the best performers in a given year. It is to outperform by a modest margin while limiting any potential downside. That is how durable, long-term outperformance is built: by owning resilient businesses and never overpaying.

V. Allocation and Sizing

Mistakes in investing are costly, and a single large loss can materially damage long-term returns. Sizing must reflect conviction, risk, and downside protection.

A full position is around 10% of the portfolio, but I will almost always start smaller, because my understanding at the outset is never perfect. As conviction builds through continued research and direct experience with the business, the position can scale toward full weight.

Because markets spend the majority of their time near all-time highs, even when buying a wonderful business at a fair price, I will typically build only 50 to 75% of the intended position initially. This preserves dry powder for meaningful drawdowns, and the ability to add at deeper value is worth giving up some early upside exposure, particularly when there are no consistent capital infusions to fall back on. Cash infusions can mask poor decision-making by diluting mistakes, so I would rather not rely on them.

In situations where a stock has fallen significantly below intrinsic value and the downside appears well-cushioned, full allocation makes sense. A cheap company can always get cheaper, but if the opportunity is genuinely compelling and the asymmetry is clear, it will be acted on.

In some cases, I will initiate a smaller tracker position when an opportunity looks time-sensitive but I am still building conviction. From there, if the stock falls and the fundamentals hold, I add. If conviction strengthens, I am willing to average up even if the price has moved higher in the meantime. In practice, I try to establish a rough fair value range and split the purchase into two to four tranches, working toward a full position as the picture becomes clearer.

Finally, if a position built at 5 to 10% grows into 15, 20, or even 50% of the portfolio because the business keeps performing, I will largely let it run. Trimming slightly is fine, but the main goal is to hold and let compounding work. Frequent trading disrupts that, adds friction, and creates unnecessary tax drag.

If nothing sufficiently interesting presents itself, waiting is perfectly acceptable. Doing nothing is often far better than trading for the sake of trading.

Above all else, regardless of position size, the key principle is avoiding anchoring bias. A position already owned should never blind me to its risks. Every material development needs to be assessed as neutrally as possible, with one honest question: does this support or break the thesis?

VI. Technical Analysis

This is where I part from many traditional value and quality investors who dismiss technical analysis entirely. I understand that view, but I see it as a useful supporting tool.

In the short term, price is largely driven by emotion, sentiment, and algorithmic trading. Fundamental analysis carries far more weight in my process, but technical analysis adds a layer that helps most when deciding when and where to enter. If I can see a stock approaching strong support, building a base, or setting up a potential further drawdown before finding a floor, that information is worth having. Pairing that read with fundamental conviction makes the entry decision more informed and reduces the risk of a poor early entry.

There is also a psychological dimension to it. Waiting to build a position at a technically sound level, on clear support or after a proper consolidation, makes entering easier and more deliberate.

Ultimately, I try to remain mindful that the market is often right. Not always, but most of the time prices reflect something real. Respecting that, rather than assuming the market is simply wrong every time something sells off, is part of how I believe I can avoid the worst entries and stay more disciplined over the long run.

VII. Global Exposure

There is real value to be found outside the United States, that is not deniable. In recent years, Chinese equities offered high-growth names trading at single-digit PE ratios that turned out to be outstanding investments. But I do not have an edge in other markets. I cannot follow regulation, currency fluctuations, government policy, elections, and competitive dynamics the way someone embedded in those markets can. So I will sacrifice some potential upside for the peace of mind that comes with staying in a market I can actually follow, and as it is, that is already a demanding task.

There are also emerging market ETFs that strip away individual name risk while providing exposure to fast-growing economies. But the data suggests high GDP growth does not translate directly into strong equity market returns, so I will sit that one out.

What I do get, indirectly, is global exposure through the businesses I own. Many of the names I invest in are already global or actively expanding internationally, which provides both real economic exposure and ongoing education about markets I do not directly trade.

I will largely avoid international names and ETFs unless the opportunity is truly exceptional. But as a general rule, if a position would be too small to meaningfully move the needle, it probably is not worth the added complexity.

VIII. No Shorting, Options, or Leverage

Carbon Capital will be purely long only.

You can be completely right about the bear case of a company and still lose money if the market stays irrational longer than you can stay solvent. The most you can make on a short is 100%, and that is only if the company goes to zero. In practice, returns are far more limited, while a short squeeze can wipe you out regardless of whether the underlying thesis was correct.

Options present a different kind of problem. There is no doubt significant money can be made with them in the right circumstances. But I approach investing as a business owner, focused on simple, durable businesses with strong long-term prospects. Options introduce gamification, timing pressure, and complexity that strips away the core concept. Leverage is the same. It amplifies returns but demands near-perfect timing, and the downside risk outweighs the reward. Charlie Munger famously said there are three ways a smart person can go broke: liquor, ladies, and leverage.

There are investors who have built extraordinary track records using these tools, and I respect that. But the goal here is to keep things as simple as possible, focused on the long term. That is good enough for me.

Disclaimer

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