My General InvestING Philosophy
It would be impossible to give you a full overview of my investment philosophy in the space I have allocated for such a discussion here. My philosophy will become clear from the blog posts I write. On occasion, Warren Buffet has described himself as 85% Graham and 15% Fisher. While I am not even in the league of these legendary investors, I would say that my investing philosophy is 70% Buffett and 30% Fisher. The Recommended Reading section might help you better understand what this means. Here are some general principles I try to adhere to with my investment decisions:
- I am not merely buying a stock. I am buying a business and becoming a part owner of a business. Every investment decision should be treated in this manner.
- I look for companies with a durable competitive advantage. This can exist in the forms of high barriers to entry for competitors, patents, high switching costs, strong network effects (winner take all being the holy grail), a strong brand name or a strong technological advantage.
- I measure the durability of the competitive advantage partly by analyzing margins over a long period of time (10-20 years) in addition to evaluating the components of the competitive advantage qualitatively.
- I generally look for high margins because they allow more room for error in the business and with inherent cyclicality in the business cycle.
- Predictable earnings stream - Can I reliably predict what the earnings will be five years from now? This is usually difficult for tech companies or companies that are on the cutting edge of technology- so I typically will not invest in companies or industries that are betting on a new technology. If I do invest in such ventures (which I do rarely), I do so consciously as a speculative gamble with relatively small amounts of capital to balance the high level of risk.
- Valuation and Margin of Safety- Valuation is an art and a science. It is impossible to know exactly what a company is worth so it is necessary to buy companies that are selling at a discount to the intrinsic value to account for the margin of error in your valuation methodology. The size of that margin of error should be determined by the risk of that individual company. While I strive for a 30-40% discount to the intrinsic value on investments, I am often prepared to go lower than that if it is a wonderful business.
- Appropriate dividend policy - If a company generates high returns on capital, they should continue to employ that capital back into the business to generate even more return; However if a company generates lower returns on capital or does not have ample opportunities to employ its capital at high returns, then it should return that capital to its shareholders in the form of dividends and share buybacks
- I value consistent dividend policy with a long history of dividend increases because I believe that it keeps management disciplined. I do not have much interest for erratic dividend policy or special/one-time dividends because I believe that it attracts the wrong-type of investor. Consistency of dividend policy = consistency of investor base
- Value creation opportunities like spinoffs and reorganizations should be capitalized on when the market is not adequately valuing these situations.
- The importance of a strong management team cannot be understated, however this is something that is not easy to evaluate. I look for things like shareholder friendly policies, limited shares outstanding growth, experience and tenure with the company, and overall competence. This can also be evaluated through the Scuttlebutt Method (see 'Why Scuttlebutt Investor?').
- Long only -While there is a lot of money to be made in shorting, I think it is difficult, high risk and not for the average investor so I don't recommend any short ideas.
- I keep a long term view and do not let short term swings/price movement impact my long-term investment thesis. I analyze short term movements and try to determine if they are driven by secular changes or cyclical changes - with the latter not swaying my conviction. The psychological aspect of investing plays a very important role here. When prices drop or the market is down, one must maintain conviction and even view such events as a buying opportunity.