Our investment approach is mainly based on the Warren Buffett’s way of investment. We pick up stocks of great companies and buy the shares at reasonable prices with an owner mentality. We believe that a great company will create value for its shareholders in long term. Therefore, we hold the shares for long term and let our investment compound over the years. It’s not a way of getting rich quick. However, with the double digit compound growth rate over a five to ten years or even longer period, it makes wonders.
We believe that this is the best way of investment because value is mostly created by companies and great companies create more values than average companies and they have competitive advantages to fend off the competitors. They create more value with less risk.
Our job is to discover these great companies and buy their shares at reasonable prices. The following is a brief introduction of our approach.
1. Never follow the day to day fluctuations of the stock market.
The market only exists to make it easier to buy and sell, not to set values. Keep an eye on the market only for someone who is willing to sell a stock at a not-to-be-missed price.
2. Focus on companies. Don’t make investment decision based on the prospects of general economy
It is much easier to understand the business of a company than the general economy, not to mention to predict it.
That said, we still keep an eye on the economy. Although it’s very difficult to predict the fate of the economy, we believe there are economical signs which indicate the soundness of the economy. We may not be able to time the market. However, we can be at least more cautious, or greedier based on our understanding and analysis of these signs.
3. Buy a business, not its stock.
Treat a stock purchase as if you were buying the entire business. Although we may only own a fraction of the total ownership of a company, we do have the mentality of the owner of the company.
We use the following tennets to buy the stock:
1. Is the business simple and understandable from our perspective as an investor?
2. Does the business have a consistent operating history?
3. Does the business have favorable long-term prospects?
Buffett never invest in high-tech area, because he believes it is difficult to understand and hard to predict. We believe that high-tech area is where we can enjoy high growth. We pick stocks very selectively based on our understanding of the business and predictability of its near future.
4. Does the business have distinctive competitive advantage?
1. Is management rational?
2. Is management candid with its shareholders and trustworthy?
3. Does management resist the institutional imperative?
1. Focus on return on equity, not earnings per share.
2. Calculate “Owner Earnings”.
3. Search for companies with high profit margins.
4. For every dollar of retained earnings, has the company created at least one dollar’s extra market value?
5. Based on the nature of the business, does the company have a healthy balance sheet comparing with its competitors?
6. Besides the reasonable top and bottom line growth of the company, is the operating cash flow healthy?
1. What is the value of the business?
The value of a business is determined by the estimated cash flows expected to occur over the life of the business, discounted at an appropriate interest rate. We always use a conservative estimate for the company’s future growth than allow enthusiasm to inflate the value of the business.
2. Can the business currently be purchased at a reasonable discount to its value?
Margin of safety is always an important factor in our decision making. However, we may pay for lower discount for a great company.
1. Keep focus on great business
One great company is far better than one thousand average companies.
2. Diversification is actually diworsification
Don’t diversify investments for the sake of diversification. As the owner of the invested companies we have limited time and resources to know thoroughly how related companies are doing