The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.
I'm a private investor managing my own equity portfolio. I write my research ideas as a way to help me structure my research and thoughts. My primary focus is on identifying undervalued companies with durable competitive advantage. My favourite strategy is to buy and hold. I avoid trading in and out of market and I passionately believe in getting rich slow and steady.
I am a value conscious investor looking for bargains.
1) Price is what you pay, value is what you get
2) Success in investing is limiting losses when you're wrong, and maximizing gains when you're right
3) Start with business model. Margins reflect value add a company's products bring to the market place. Does the Gross Margin and the Product match? High GMs accompany differentiated products with limited competition that do not compete on price. Low GMs accompany undifferentiated products that compete on price, CAPEX spend, cyclicality.
4) How is the business financed? Be wary of companies with a lot of debt. Great businesses do not require huge debt to generate high returns on equity. There is no achievement in generating high ROEs by levering up like banks, leasing businesses (car rental, equipment rental, aircraft rental). ROA should be telling here.
4) A company's value changes because the NPV of future profits changes. NPV of future profits is a function of changes in revenues, gross margins, OPEX, leverage, taxation. A company's value appreciates when the NPV of profits goes up due to revenue growth, GM expansion, OPEX reduction, leverage (refinancing) / tax (change of domicile) reduction.
5) Markets look forward. Bottoms coincide with maximum pessimism while tops coincide with maximum euphoria.
6) A stock is not undervalued because it is cheap and it is not overvalued because it is expensive (based on traditional valuation metrics). Similarly, a stock is not undervalued because it has gone down a lot or overvalued because it has gone up a lot.
7) Look at market cap when valuing companies. Don't be overly influenced by management projections, analyst reports, share buybacks, cash on B/S, price movements, other people in the stock.
8) Companies with significant debt can go bankrupt. Cash burn typically determines if they go bankrupt before the cycle (for their industry or the economy) turns.
9) Undervalued stocks can get cheaper, overvalued stocks can get more expensive.
10) Keep emotion out of investing. You will be wrong. Unpredictable things will happen. Stay vigilant to anger, anxiety, exuberance. Stay vigilant to thesis creep.
11) Leverage will kill you sooner or later. Companies have large operating and financial leverage.
12) Have a thesis. If the thesis plays out, stay with it. If it doesn't exit. Always have a thesis.
13) Understand the business you are invested in. It's valuation and what can go wrong. Know the business inside out.
13) Don't trade.
14) Diversify. There are many good ideas in the market. Don't put your eggs in one basket.
15) Failing businesses rarely turnaround.