Once in a while, someone will ask me how i would structure an investment process. I’m still thinking about the perfect answer, but can provide a partial solution by examining the characteristics of some of the Worlds best Value Managers. We find they appear to share six key traits, all of which stem from their investment philosophy.
What distinguishes the best value Investors from the rest?
1) Firstly – They all Hold Highly Concentrated Portfolio’s. Across the 10 Funds we examine the average number of companies in the portfolio is 13. In-contrast to 38 in Average Mutual Fund Industry.
2) Secondly – They are not obsessed with Noise – They don’t worry about trying to know everything about everything. The funds examined do not employ legions of analyst to waste time forecasting next quarter EPS. Instead, try to focus on understanding the valuation and its associated risks. By risk, these managers mean concerns surrounding outlook for profit margins and balance sheet, not the price volatility of the market.
3) Thirdly – On Average they display a willingness to hold cash in face of a lack of investment opportunities. Much like the Concentrated Portfolio, this decisions stems from the core philosophy. If they cannot find bottom up bargains they are happy to hold cash until they can. Right across 10 funds we examine, their cash levels are nearly three times greater than average mutual fund.
4) Fourthly – Our Value Investor Group have long term time Horizons, Their Average Holding Period is 5 years. In Contrast the Average is 1.3 years for mutual funds.
5) Fifth – These managers accept that they will have bad years. Tweedy Browne published a study showing that a group of value Investor with Excellent track Record under performed the Index 30-40% of the time. One manager went as far as to say ” I would rather lose half my Shareholders than half my shareholders money”
6) Finally – Unusually in a world where asset managers are often paid with respect to Assets under Management, these managers are not afraid to close their fund to new Money. The managers we study are highly cognizant that there are limits to the size of funds they are capable of running without hitting problems. These Managers still have a sense of fiduciary responsibility.
At Stallion Asset, we are not Core Value Investor i.e. we don’t buy stock only because its cheap. The whole idea in investing is to buy into good businesses and if the business does well, you do well in investing if you don’t pay too much. That was true 25 years ago and it will be true 25 years from now.
Stallion Asset has returned 288% for the last 3 years using its Growth at a reasonable price strategy which is back tested over last 22 years.