1. Securities are ownership interests in businesses, and fundamental  business analysis is the bedrock of the Crossroads Capital process.

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2. Businesses have intrinsic value, which is nothing more and nothing less than the sum of expected future cash flows properly discounted for risk. Even though intrinsic value is inherently unobservable, difficult to quantify, and constantly changing with new information, it is the fundamental building block of sound investment decisions; i.e., intrinsic business value is the “north star” of successful  portfolio management.

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3. Although markets are generally efficient, prices can and do differ significantly from intrinsic value. Active managers exist to exploit these inefficiencies.

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4. The best way to maximize long-term, risk-adjusted returns is to patiently and methodically purchase securities at the largest possible discount to intrinsic value (and vice versa with respect to our short book).

• ‍In time, the gap between market price and value will close; i.e., in the long run, markets are generally efficient. Or as Buffett once put it, “in the long run, markets are a weighing machine.”

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5. Even though market prices tend to converge to intrinsic value over time, it is preferable to invest in businesses with relatively distinct catalysts capable of driving convergence over a definable timeframe.

• A catalyst-rich event path not only accelerates the recognition of underlying value, but it also helps protect our capital during downturns by lessening  our reliance on the market and the economy for investment gains.
• Moreover, the presence of catalysts yields a clear path to value creation (or price  discovery), providing a clear understanding not only of what specifically should make the stock work, but when.

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6. Gaps between  price and value tend to arise for many reasons. At Crossroads, it is critical to have a well-developed view of why a security is mispriced.

Common reasons for mispricing:

• ‍Non-economic selling: Buying/selling with little regard for price due to  institutional constraints/segmentation.
• Career risk: Investors over-emphasizing next quarter due to career risk associated with short-term  performance.
• Psychological biases: Over-reaction, herd mentality, difficulty reasoning  about uncertainty, recency bias, etc...
• Informational inefficiency: Information not being priced in due to complexity  and/or small size of business.
• Analytical inefficiency: Marginal buyers/sellers are rational and are  well-informed, yet they are still incorrectly assessing future business  performance.

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7. Certain types of securities are more likely to be mispriced than others. We focus on these types of securities, investing in catalyst-driven situations with large margins of safety and asymmetric risk/reward profiles.

• Value Plays: Neglected/out of favor all-cap “compounders” where primary catalyst is the passage of time
• Special Situations: Securities whose near-to medium-term performance is independent of market performance
• ~~Event-Driven Investments: Securities arising from corporate events that create complexity and/or forced buying/selling, e.g. spin-offs, rights offerings, recapitalizations, post-bankruptcy equities, distressed credit, de-mutualizations, merger securities, SPACs…
• ~~Internal Restructuring/Change: Ops undergoing or about to undergo significant internal change uncorrelated w/ market
• Emerging Franchise: Underfollowed small- to mid-cap growth equities with little to no institutional following
• Stand-Alone Shorts with a Catalyst: Value traps, highly leveraged cyclicals, businesses in secular decline, frauds, …

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‍8. The benefits of concentration outweigh its costs. Our 10th best idea is vastly superior to our 40th, and the marginal benefit of diversification is small after 10-15 positions.

• Ability to concentrate time & effort on uncovering a limited number of highly attractive, non-market-correlated “best ideas” minimizes risk of permanent capital loss, idea dilution, and crowding.
• Performance over time correlates to the outcome of ideas rather than to the performance of the overall market.

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9. Our concentrated approach will likely expose investors to volatility. For a small  group of investors, however, volatility creates opportunity, not risk:

• Most retail investors should not ignore volatility due to near-term needs, such as retirement or college tuition.
• Even most professionals cannot ignore volatility due to career risk associated with how they are evaluated.
• However, a small minority of investors and managers can and should ignore volatility, as the excess returns associated with a long-term focus are increasingly immense.

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10. Exercise patience and discipline to invest in only exceptional opportunities. Extraordinary  ideas are rare, so rather than own a broadly diversified portfolio,  Crossroads concentrates its time and effort on a small number of ideas. This  approach makes it easy to be patient. Also, concentration reinforces the  selection of investments that have very certain prospects and a low  likelihood of permanent loss, ensuring a portfolio that is less risky relative to more diversified alternatives.

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11. Wealth preserving portfolio construction. Taking  our cue from Buffett, we use overall portfolio structuring as a defensive  tool by focusing on how each of our investments will work together in the  context of the Fund as a whole.

• Constant evaluation of risk at both the portfolio and individual position level.
• Don’t risk ruin: Leverage cuts both ways (“To finish first, first  one must finish”).
• Hedging of individual positions and portfolio/macro level concerns using available  low-cost alternatives.
• Options strategies to limit risk and ensure a wider range of profitable outcomes.

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12. Pre-tax returns are irrelevant. Our investors care about long-term,  risk-adjusted, after-tax, net-of-fees returns.

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13. We view as critical to the success of the partnership that we only admit Limited Partners who share our value-centric investment philosophy and long-term orientation.

• Strongly-held conviction that the most successful, enduring investment partnerships have resulted from robust philosophical alignment.
• Indeed, one of our partnership’s central “competitive advantages” is precisely the long-term orientation of our capital base.
• As such, we fully intend to sacrifice fund size in order to ensure that we admit only suitable, high-quality Limited Partners.

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14. Our long-term orientation and like-minded limited partners position the investment partnership for success.

• This contrasts with most money managers, whose investors tend to evaluate them over periods spanning one year or less; and/or Wall Street analysts, who tend to be focused on the next quarter’s fundamentals rather than intrinsic business value – two approaches that are not only foolish, but anathema to the principles of long-term wealth creation.
• If Crossroads is in the 1% of funds evaluated on a truly long-term basis, we will have an enormous advantage.

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