Investing for value
What is our investment philosophy for stock selection?
We strive for the best risk-reward ratio. We look for the very best companies that offer high opportunities with minimal risk.
We are convinced that the right foundation for a sound financial strategy is a clear mindset or philosophy. We believe the right approach is to see the stock not as a number that goes up and down, but as a part of a company. This view not only lowers the stress level, but also makes it necessary to do a fundamental analysis before buying a stock and prevents people from gambling on the stock market. So before we buy a stock, we ask ourselves, “Would I hold the stock even if I couldn’t see the daily price fluctuations for 10 years?”
We think two things are especially important for analyzing a stock: skills (“Circle of Competence”) and patience:
“Knowing what you know and knowing what you don’t know is true knowledge.” – This quote by Confucius, which is over 2,000 years old, is one of the most important points of view in my opinion when it comes to stock selection.
Thus, one should be aware that one cannot fully understand every company and its fundamentals. This fact causes that it is elementary for a successful investment to invest constantly in its human capital. Thus, we think that one would not want to invest in a company until one can comprehend and understand its business model and its industry.
In addition, you should know the fundamentals, the management, the risks, the competitors, the valuation, etc. in detail. For us, this automatically rules out investing in banks or small start-ups, for example.
In fact, one thus excludes a number of investments. Can you therefore also miss an opportunity? Quite possibly. However, one should keep in mind that the probability of losing money on a stock whose company one does not understand, but simply buys on good luck, far exceeds the chance of accidental profit. The fact that most private investors lose money on the stock market is due to the fact that they often buy stocks whose brands they know or have heard about from acquaintances, but do not subject this stock to any fundamental analysis. Even with first-class managed companies, many losses can be made. No matter how great a company’s products are, if you buy its stock at too high a price, you will make a loss.
On the other hand, if you buy shares of companies that you understand, the risk/reward ratio is many times more advantageous and you can make a large fortune on the stock market in the long run.
In addition, patience and discipline are very important – often underestimated – virtues that often distinguish the winners from the losers on the stock market. As Warren Buffett once said, “The stock market is a mechanism for transferring money from the impatient to the patient.” This quote very accurately illustrates the need to be calm and rational in any market phase and resist the greedy or fearful exaggerations. The easiest way to internalize this rule is to think of a stock as part of a company rather than as a number.
When investing, we take a value approach. We are interested in companies with a solid history that shows they can operate successfully even in difficult market conditions. In addition, the company should have a highly profitable business with a large moat that protects it from new entrants and allows for high profit margins to give shareholders a generous return on their capital. In addition, the financial situation is also very important. We select companies with a conservative financial structure that have enough cash reserves to withstand difficult market phases.
Only when all these criteria are met do we turn our attention to assessing the intrinsic value. If this value is below the current market value, this share is undervalued and the chances of an above-average return are very high.