Equity Investments

Value Investing for Long Term Capital Appreciation

Fundamental Analysis of Intrinsic Value

We are value investors. Our view is that equity market valuations fluctuate around their intrinsic value, broadly following business cycles, and that these fluctuations create opportunities for outstanding long term returns. As Sir John Templeton put it, "bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria".
Financial history has constantly shown that markets overreact. They become overly pessimistic and significantly undervalue stocks during a recession, while they become overly optimistic and significantly overvalue stocks at the top of a business cycle. Our strategy is thus to aggressively buy high quality, deeply undervalued stocks during recessions/market crisis, and to sell our holdings when they are overvalued. This allows us to protect our gains in absolute terms and to be ready to buy once markets come back to undervalued territory.

Market Cycles

We overlay to this approach an analysis of market cycles. We believe that markets have four phases - phase 1, when markets form a bottom; phase 2, when markets rise; phase 3, when markets form a top; and phase 4, when markets fall. We identify market cycles using two methodologies. Our main methodology is the bottom up, fundamental analysis of stocks that we know well. When most, or all, of the stocks in our universe are overvalued, we take this as a sign that markets are too expensive. When most, or all, of our stocks are undervalued, we take this as a sign that markets are overly pessimistic and we buy. We tend to look at a constant universe of high quality businesses, in order to know our stocks well.
Our second methodology to identify market cycles and form our view is more of a technical nature. We look at the length of business cycles, at commodity prices, at some technical indicators analysing capital flows in equity markets, and at trends. This analysis is performed only to confirm our fundamental view, and to provide us with an indication for timing.
We are driven by fundamentals, and do not try to take views on "bubbles" and on how long they could go on. As a result, we could wait on the sidelines for a significant amount of time if a long lasting bubble, disconnected from reality, forms. This is consistent with our goal, to preserve our capital, and with our market philosophy that at some point, bubbles bust.

Patience for Long Term Success

Warren Buffett once said “The Stock Market is a highly effective mechanism for the transfer of wealth from the impatient to the patient.” When we believe the stock market is expensive, we wait in cash. We are aware that we may be too early to sell our holdings, but we can patiently wait in cash that markets come back to depressed valuations, especially after taking what we view as "reasonable absolute profits" for one market cycle. Our goal is to catch at least one market cycle per decade, and to at least double our holdings per market cycle. At this rate, it takes 5 cycles to turn $1mn into $32mn. Our stock strategy is thus long term and not aimed at producing income. It is the "growth" portion of our portfolio.