Below is a summary of the equity investment process I have developed over more than 20 years of reading and practical investment experience.

We thought it would be worthwhile to share it with you so that you can understand how I think about investing. 

Overview

Objective

Produce attractive positive long-term returns irrespective of market returns.

Strategy

Apply a disciplined, long-term orientated opportunistic value approach based on rigorous fundamental research.

Hedging & derivatives

Only used to enhance returns through selective position taking.

Investment Strategy

I believe that markets are mostly efficient and securities fairly valued. Sometimes however securities are miss-priced creating profit opportunities. Such opportunities occur because of irrationality or a short-term focus.

Opportunities can appear in any sector or in any type of security thus we am a generalist without favouring a specific sector or company size.

Opportunities typically fall into three categories:

1. Unknown - No analyst coverage and or small companies

2. Unloved - Missed profit forecasts, sector out of favour, restructuring and financial distress

3. Special situations - Workouts, liquidations, delistings and spin-offs

Investment Process

Identification

I identify possible investments through reading, screening using certain financial ratios and examining the activities of certain asset managers. we however, always make our own analysis before investing.

Circle of competence

I only invest in companies of which we understand both the business and the financial statements. I keep things simple with investment ideas usually explained in a short paragraph.

Company

Is it a good business?

Does it have a sustainable competitive advantage?

High cash returns on capital?

Healthy balance sheet?

Strong free cash flow?

Has it got pricing power?

Industry

Are the trends favourable?

What are the competitive dynamics?

Management

Are they trustworthy?

Are they good capital operators?

Are they good operators?

Valuation

Is the security really cheap? Why?

What is the risk return relationship?

I seek to buy at attractive prices the shares of good businesses that we understand and

which are run by capable, honest and shareholder friendly management.

Portfolio Management

I do not believe in diluting our best ideas with inferior ones and thus invest in a concentrated fashion.

However, as no one can foresee the future development of security prices and as we want to limit the loss of capital as far as possible. Our portfolio typically consists of between 15 to 25 securities.

Securities are bought when they offer an attractive discount to underlying value.

Selling takes place when we believe a security is fairly valued or if the proceeds can be invested in a more attractive position.

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Risk Management

I define risk as the permanent loss of capital.

I do not equate risk with the inevitable short-term movements of the market thus I may buy more of a security after the price has declined.

I believe that buying a security that is trading substantially below its intrinsic value is the best way to eliminate risk.

Only after I have limited our downside risk do I consider the upside potential of a security.

I do not believe in leverage.

Even though I do believe in concentrated portfolios I seek diversification by industry, market capitalisation and type of investment.

Also have a look at:

How I select investments

Financial analysis example (PDF 27 KB)