My Investment Philosophy
I see myself as a value investor in the tradition of “Graham & Doddsville”. What does that mean? The term Graham & Doddsville was coined by Warren Buffet in an essay dating back as far as 1984. In it, he describes an investment philosophy which consists of three major components:
- Buying a stock means purchasing a small portion of ownership in a company. This company manufactures products or offers services, which are created by employees and purchased by customers. Therefore, a stock represents real value which means far more than just a promise on a piece of paper or a quotation on the stock list. In order to assess the value of a company and ultimately the intrinsic value of the stock, an in-depth understanding of the respective company, its business model, executives, competition, and ownership structure is imperative.
- The value of a company and its stock price do not correlate all the time. The stock price is affected by many at times quite irrational factors. Investor emotions, regulations, restrictions, and even algorithm-based trading models determine the stock price, leading to considerable deviations between the stock price and the actual value of a company.
- An investment must have an adequate margin of safety. When an investor buys a share at a substantial discount to its intrinsic value, it allows for a buffer. This buffer proves very valuable in case the estimate of the intrinsic value was too optimistic or unexpected events occur.
I do not believe in a market that is efficient and rational at all times. Most investors and investment companies are subject to numerous constraints, regulations, and practices that make it impossible to always make both rational and long-term investments. Factors that make rational and long-term investments impossible include, among many other factors, committee decisions, major capital inflows or outflows, or short-term and false incentives in the decision-making process (“it’s just other people’s money”).
When determining whether a company qualifies as an excellent investment target according to our philosophy, it must meet four basic requirements:
- 1) Does the company have a comprehensible business model?
- 2) Does the company have a sustained competitive advantage?
- 3) Does the management team act rationally, with integrity, and does it consider the shareholders to be partners?
- 4) Can we purchase the company’s stocks at a reasonable price?
For most companies, two or three of these questions can often be answered with “yes”. However, it is rather rare that all four questions can be answered with a resounding “yes”. In considering the extent to which the individual factors are met, I proceed methodically and diligently. Even though I will not compromise on #3 and will never (knowingly) invest in a company with a dishonest or incompetent management.
I focus on a small number of companies in order to be able to follow their in-depth development with the necessary attention. While this is not a guarantee of success, it certainly prevents mediocre results as guaranteed in the case of a very broad portfolio.
I measure the success of investing based on its long-term average annual return.
My goal is to achieve the highest possible return over a long period of time. What does long term mean? Contrary to what stock market news may suggest, the quality of investment decisions cannot be measured in days, weeks, or months. An investor’s skills can only be seen in his or her results over several years, surpassing periods of rising and falling markets. Therefore, my understanding of “long term” encompasses a period of five years, likely more. As I see it, an investment manager is successful once he generates a yield above that of broad stock market indices (e.g. DAX, MSCI World) and one that is positive in absolute terms. Temporarily strong fluctuations of the markets are inevitable and one should not trying to anticipate or minimize them. In other words, I will always prefer a return of 10 percent achieved with a high volatility, over a yield of 5 percent without volatility.