Matt Williams: It's not just about what you own in the portfolio, it's about what you avoid

Investing is a "choose your own adventure" pursuit. There is a sea of variables and the last thing you want to be is adrift without a rudder or map.

We like to think that's what Livewire is for. We give you a boat with a rudder and a map and the rest is up to you. 

In that spirit, this week's episode of The Rules of Investing takes us on an adventure through the career and investing principles of Matt Williams from Airlie Funds Management.

Williams has seen it all and learned from some of the best. This has left him with a process that really anchors his portfolio during periods of volatility - and a Hall of Fame induction to boot. 

Listen to the full chat above, or read on for some of the key takeaways below.

Resources saved us... this time

Australia is in a unique position. It's often described as a "two-speed economy", and for good reason. The resources sector out in the west is separate and apart from the rest of the economy. 

This helps offset some of the volatility. So whereas the S&P500 is down almost 20% year to date, the ASX200 is down about 5%. 

"Within that, if we wanted to split the market the market between industrials and resources, resources are up 16% and Industrials are down 9%," says Williams. 

Equally, however, having so much of our economy made up of commodities can work against us. 

"The economy's probably sailed through but our market has had some down periods because resources have had a tough time - I think back to 2015 when resources had a turndown... BHP dropped to $17 and Mineral Resources got to $3."

Fortress balance sheets

For Williams, strong balance sheets are the foundation of strong businesses. 

If a company doesn't have cash or the ability to quickly generate cash, it's not going in the portfolio. 

At least a third of the companies on Airlie's books are net cash. 

"Companies with really good balance sheets can withstand whatever gets thrown at them."

As Williams notes, companies with strong balance sheets usually outperform over the medium and long term. The short term? They can perform there too, but they're often drowned out by the louder companies that attract speculative money. 

Mineral Resources (ASX: MIN) is more than a lithium price

Airlie bought into Mineral Resources early, thanks to Williams' colleague Emma Fisher, turbocharging their Aussie share fund as a result. 

Airlie bought it a couple of years ago. It wasn't initially a lithium play, although that has become a big part of the thesis since then. 

"It was mainly the mining services business that we liked and the lithium was an interesting part of the story, and now lithium has come to dominate that business."

"The fundamentals look very strong for lithium, and we've seen the result of that in the share price performance."

It's not just the space that Mineral Resources play in. It's the way they play that space that's important. 

Chris Ellison has one of the best track records of capital management, says Matt, buying low and selling high."

"Some of his deals are history-making. Wodgina [lithium operation], their biggest lithium mine, [Ellison] bought for less than $100 million and sold half of it for well over $1 billion."

"He's a fantastic deal-maker... and now he looks like he's doing it again in Gas in the Perth basin."

When the market falls, buy up quality on the cheap

Quality companies are quality companies, at all points in the business cycle. 

So for investors, a falling market is an opportunity to fill the portfolio with more quality. 

"Things you've always wanted to own but have [previously] been at a price that makes it seem like there isn't much upside."

Williams points to REA Group (ASX: REA) as one such example. 

"One of the top three businesses in Australia is REA, but just always feels a little bit out of reach, a little bit too expensive. So that would be number one on my hit list."

Similarly, Airlie used to own ASX Limited (ASX: ASX) but sold out. Now that it's back in the headlines, with a bit of management turmoil, it's back in Williams' crosshairs. 

The stock worthy of Buffett

Drum roll: James Hardie (ASX: JHX)

"James Hardie is one of the few building materials companies, if any, that earn margins in the 20s and have a return on invested capital in the 30s," says Williams. 

"If it didn't have an asbestos liability, the company would be taken over by now. I think it's a perfect Warren Buffett company, and I wouldn't be surprised if Berkshire [Hathaway] bought it one day."

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