We never cease to be astonished how little time and effort is
spent studying the key success factors behind the small number of
investors who have been truly great, past and present, and their
application to practical money making investment decisions
The key success factors that we knit together into our own
philosophy of investing are as follows:
- Invest in companies where the estimated intrinsic value exceeds
the stock price by a significant amount. This is what Ben Graham
referred to as the "margin of safety".
- Invest only in companies you understand - This is Buffet's
"circle of competence" concept.
- Invest in companies where you have confidence in the management
with respect to their honesty and competence. Examine in particular
their capital allocation actions; when to pay out and when to
retain. Seek out managements that stress share price performance
and return on shareholder's equity (ROE), rather than the absolute
size of the company, (many large Canadian companies fall into this
trap of size versus per share progress).
- Pay careful attention to the quality of earnings, and the
ability to generate free cash flow and its deployment.
- Seek out companies that have a strong competitive position or
barriers to entry. If you don't have wide "moats" around your
"grand castle", competitors will penetrate your territory, erode
your profitability and eventually cause your downfall.
- Watch for brand names and natural oligopolies of various types.
These are rare but extraordinarily valuable over time, especially
if purchased when they are out of favor in the marketplace.
- Be a willing buyer of good companies when they are under
pressure and when most investors are selling because of bad short
Buy low, sell high! goes the adage. So, we have developed a
proprietary investment process based on factors or characteristics
that relate to risk, liquidity, profitability, cheapness, technical
history, and analyst's ratings and earnings estimates. Our models
estimate monthly individual expected stock returns for the stocks
we follow in several countries.
Michael Ghilissen, managing partner