“Investment Philosophy” is a big word. Many investors claim to be philosophers of the market and some confuse the legitimate intention of making money to somehow pushing the limits of knowledge and understanding.
I will not make such claim, however would like to explain in this post what kinds of investments I am looking for, what matters to me and was has turned out to work well or not well for me.
Find niches and look where most people are not looking and use your advantages
Many investors feel comfortable in well-known and well-covered names. While over the years I have been able to do good investments in some of these companies, it is more difficult to find juicy returns here. That is because there is often an army of professional sell-side and buy-side analysts covering the company making it very hard to gain an informational edge. From time to time, there may be situations when the market misses an important aspect or becomes unreasonably pessimistic about company which could depress the stock price and make it interesting.
Still, for my investment concept I need to understand the strengths and weaknesses of my setup:
First advantage: My Assets under Management are still fairly small (around one nillion EUR). That may be lamentable, yet it means that I can find ideas that move the needle even in micro and nano caps. A 5% position means an investment of 50K EUR - I can get this liquidity in many stocks - also in the ones many institutions do not even dare looking at.
Second advantage: I have an ultra-patient investor base. They are myself and my family and I have been managing some money for them for years. They do know my skills and my spirit and will not harrass nor second-guess me on a monthly or quarterly basis. So, if the portfolio nosedives (think March 2020), I can just look at the market and do what I think is right - there will be no nervous calls. Also, the money committed is long-term and I do not have to consider any potential withdrawals. This will also allow me to invest in more illiquid situations.
Third advantage: I am relatively open-minded about investing in other countries. As a European (German), I feel that I should not exclusively focus on my local home market which is only a tiny share of the global capital market. Obviously, I want to be open for other markets, in particular the ones out of favour. Greece has been one of my favourite markets for a number of years, but I have made investments in companies in the US, Netherlands, Poland, Italy, France, the UK, Australia, New Zealand, China, Romania, Canada, Bangladesh, Mexico and others. Going international means more opportunities for good niche investments. I have become more aware of political risk over the years and am looking to avoid countries where the rule of law and property rights are questionable.
Weaknesses: Before starting thisproject, I spent some time thinking about when I took poor decision in investing over the last couple of years. Unsurprisingly, I made a lot of beginners’ mistakes. Yet, I recognized that I tended to be overcautious, overdiversified and at times undisciplined/distracted. On reason for writing this series is keep these biases in check:
I am planning to run the portfolio with around 15-25 positions, for an average of 5% per position. There will certainly be disparity in the weight of the positions reflecting my conviction levels. Yet overall, this is a level of concentration/diversification I can handle well, for in terms of workload and emotionally.
Moreover I will not hold a significant cash position. The money is in the company to work, not sit idlly. Intead, if I feel for the market to be expensive, I will likely overweight the special situations bucket (see below).
3 buckets to sleep well
As I explained in my first post, I am managing my own & family money. Also, having been socialized (financially) during the Credit Crunch time, I learned about the great advantages of playing from a position of strength. For me, this means to make sure to use no leverage and to construct your portfolio in a way that it can weather all market situations. This does not mean I have no acceptance for volatility - I do and I think it is necessary for anyone striving to achieve above-average returns.. Yet I also do know the feeling of having seen my portfolio shrink by half (while not being financially independent) and it is not a great one.
Hence, my goal is not to avoid any volatility but to construct a portfolio in such a way that it permits me to stay mentally calm - even if prices move down sharply. In other words, I want to sleep well even when I am underwater by a lot and it feels like the world is falling apart. Sleeping well is more important than a few percentage points of potential return.
My method of achieving that is by investing in three types of situations, call them buckets:
1.High Quality Companies
One way to make sure I sleep well is to invest in high-quality companies. These are companies with an excellent competitive position, run by a competent and well-incentivized management. Also, these companies are growing (though there is no need for rapid growth) and conservatively financed. Typically, the above characteristics will result in high margins and excellent returns on capital.
While these companies can and should command a price premium, I am hoping to find excellent companies that not many people are aware of (yet). The business quality and improving profitability means that over time, these companies will be worth more than today, even if the price may come down from time to time. I will be able to stay cool based on company fundamentals
2.Special Situations
One of my favourite books on investing is Greenblatt’s “You can be a stock market genius” which is all about special situations investing. After initially just dipping my toe in a few special situations, starting with spin-offs, I am making a special situations bucket a core part of my portfolios. this may be spin-offs, merger arb, rights issues, liquidations or bankruptcy/reorg situations. What I like about special situations is that they offer the chance to decouple the portfolio a bit from general market moves. Furthermore, I do appreciate the self-liquidating feature of some of these situations (like merger arb and liquidations) where ideally you do not need to think about selling but rather just have to wait for the cash to hit your account.
3.Tiny Companies
The biggest opportunities will often be found in tiny, illiquid and uncovered firms. These may sometimes trade OTC or on pink sheets and not a lot of people care about them. Some may also be based in exotic countries. A lot of the time, these companies can also often be understood more easily as they often have a simpler and more pure business model as opposed to titans with many segments/divisions. Moreover, microcaps and nanocaps are often not investable for certain institutional investors - until they become small caps at least. So I will try to use the limited competition here. Also, I will be extra-interested if these tiny companies are high-quality or special situations.
Research Approach
My idea generation will not rely on broker reports or Bloomberg screenings. While both can be helpful at times, most research will not cover the situations I am looking for.
Instead, I try to read a lot - both on investing blogs and on fintwit for initial ideas and will then check them based on primary company information. TIKR is a great a cheap tool for financials overview.
Some outstanding fellows worth following include: Value & Opportunity , Yet another Value Blog, Clark Street Value, Alpha Vulture, No Name Stocks . It is also worth following various funds managers such as the guys from Langfrist in Germany and Alluvial Capital in the US. I have benefitted enormouly from these guys sharing their ideas and knowledge. All of them are highly astute investors and an inspiration for my project.
So much for now on the Investment Concept. I expect to start posting ideas next time.