Investing is about finding the best possible investor returns with the least risk of losing the initial money put in, and then compounding returns in the long term, for exponential gains to ours and yours personal wealth. We invest together in the same fund, so our interests are aligned.
We try to find cases that answer the following questions: Can I buy something today that is already worth more? (value investing), or with a very great likelihood of becoming worth more than ‘today’ even when central banks stop pumping money, and earnings multiples return towards the mean (growth investing), or ideally both – undervalued companies that can grow?
We do not have many candidates that fulfill such criteria, but we do have enough for our portfolio. A portfolio we believe can weather the less common but completely normal downturns, which are to be expected in a capitalist economy.
Whether that would be a correction, recession, depression or even a stagflationary environment, we believe we have positions that are worth holding on to, and a setup that allows us to hold on, even when it gets tough. That is why we lock in money for enough time to avoid being forced to sell at a time that we do not choose. That should be in our investors’ best interest.
Taking on leverage to beef up returns is something to be avoided most of the time. Especially in these times when many assets are priced to perform to perfection. However, we do maintain the option in the fund, mainly to ensure that we can short the market, and possibly benefit from a downturn.
While many factors play in when selecting positions for our portfolio, and models and the past history are only guiding tools, we pay attention to the teachings of Fischer’s 15, Piotrosky’s 8, and Buffet’s sound logic of being able to understand what we buy into product wise, and not just based on fancy growth in company finances.
To expand, we look for:
Smaller sized companies for long positions, and relatively bigger companies for short positions, both of which should have stock price catalysts within 2 years for our initial scenarios to play out.
We are not overly concerned with diversification, as strong convictions of having bought a good company is more important than diversifying to companies we believe in less, or know less about, risking poor performance.
On the bigger picture, our process entails:
1) Underlying market growth is assessed. Understanding trends and investable themes can be a starting point. Even if management is stupid, or something bad happens, they are still in an industry that is doing great as a whole, so it cannot go too bad.
2) Business outlook is assessed. Looking at business models, products, direct- and indirect competition, company specific performance, balance sheet quality. Are we buying quality, that can stand the test of time?
3) Evaluating management. How are their priorities? Communication? Appearence? Skills? An excellent management is what most strongly impacts investment returns.
4) Price. If the 3 first indicators are good, the price determines whether to buy, or simply monitor if the stock comes into a reasonable price range. We are not afraid to buy in at high multiples, if we believe the company will maintain high multiples because of its quality in the future. However, if the multiples are too stretched, and unwarranted, we say no. If we are in doubt, we say no.
5) Position sizing is a true mark of investor intelligence. Initially we size purchases as a smaller percentage of what we expect to buy. There is much intel in following the price once it is owned, and the ongoing newsflow. Understanding the story of the price development, i.e. is there a good reason why the stock is undervalued, helps us build confidence in increasing our position size.
6) At all times, we follow the businesses we own. That could be with external consultants, in dialogue with different stakeholders, or by educating ourselves in different ways, to broaden our minds and deepen our views. We focus on the business story, and if our thesis remains intact. We care less in the short term about stock price developments, with regards to liking or disliking the case. But if the business case remains intact, any fall in the stock price, is an invitation to buy.
Strong research allows us to sleep well at night, regardless of price developments in either direction. We expect our positions to earn more in the future, and within reasonable expectations of earnings multiples, the stock prices should follow in an upwards trajectory set by expanding cash flows.