Finance > Shares

Overall Investment Strategy

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galumay:
fine tuning the strategy and simplifying,

* Buy good companies

* At a fair price or better

* Do nothing for a long time

Identify good companies -

* Must be undiscovered/not covered

* Must be financially successful or likely to become so.

* Must be understood by me

* Must be safe, no catastrophic risk, ideally asymmetric risk

* Must be durable

Good businesses have a high return on invested operating capital, businesses that have high levels of intangible assetts, they have the ability to grow by reinvesting cash generated by the business.

We estimate the free cash flow of every company after tax and interest, but before dividends and other distributions,
and after adding back any discretionary capital expenditure which is not needed to maintain the business. Otherwise we would penalise companies which invest in order to grow.
Our aim is to invest only when free cash flow per share as a percentage of a company�s share price (the free cash flow yield) is high relative to long-term interest rates and when compared with the free cash flow yields of other investment candidates both within and outside our portfolio.

galumay:
Picked this up reading the Canadian firm Burgundy Assets

https://www.burgundyasset.com/wp-content/uploads/TheViewBook_2017_Web.pdf

� Invest in companies in which 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 Buffett�s circle of competence concept.

� Invest in companies in which 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 favour 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-term news.

galumay:
Buffett on Ben Graham - 3 basic principles,

1. that you should look at stocks as part ownership of a business;
2. that you should look at market fluctuations in terms of his �Mr. Market� example and make them your friend rather than your enemy by essentially profiting from folly rather than participating in it; and finally
3. the three most important words in investing are �margin of safety,� which Ben talked about in his last chapter of The Intelligent Investor � always building bridges that can carry 30,000 pounds but only driving 10,000-pound trucks across it.

galumay:
Burgundy Assets

We look for companies that deliver high returns on shareholders� capital consistently, which are well financed and run by trustworthy and competent people. We try to find a number of these investments and then hold them for the long term.

galumay:
more from Burgundy assets

Four Underlying Investing Principles
The first step in our protocol development is to agree to the facts and assumptions underlying the Buffett approach. If we cannot agree on the basics, then the quality/value system is not for us.
1. Long time horizons are absolutely necessary. If we want to earn returns that are better than bond yields, then we need to adopt the very long time horizon that is appropriate when investing in stocks. If that is not possible, then this is a signal to opt out of the Buffett system.
2. Earning equity returns without being exposed to equities is impossible. We must own equities to earn equity returns. Expecting to jump in at market bottoms and out at tops is unrealistic and risky because equity returns are discontinuous. We don�t want to miss the few really big �up� days. While there may be many ways to get to heaven, there are no shortcuts.

Success at �timing the market� could only come from success at repeatedly predicting the short-term future. In a complex, adaptive world where any spontaneous order is temporary and many of our earthly systems are often operating at the edge of chaos, predictions about the future are more difficult than they seem. Repeatedly getting them right is impossible. In financial markets, as in life, surprise is the rule, not the exception.
We are not aware of any study or long-term track record concluding that anyone has repeatable expertise in market timing. Even Buffett likes to say he attempts to price, rather than time, his investments. Again, if we cannot agree with being long-term stock owners, here is another chance to opt out of this approach.
3. Quality stocks are the only way to go. While there are always a few who get lucky guessing on speculations, there are many more who lose it all. We must agree that only quality franchise companies with persistent competitive advantages and strong management will be owned.
4. A buy-and-hold approach is best. We will buy these quality franchises when they are cheap, with the plan to hold them forever if nothing changes.

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