Investment Philosophy

Strong fundamental analysis on companies has never been more important during these testing times.
A good framework provides some downside protection on portfolio investments which could be competitive advantage against peers.
Here are some useful points I've recently picked up at a talk given by Anthony Bolton, which my opinion even if you’re not a research analyst, can be used as a framework for investment philosophy

1) Companies
- always start by looking at the company
- how good/strong is the franchise?
- note that businesses vary in quality and can change over time
- prefer strong franchise and simple businesses
- what are the key variables that affect the business?
- MEAN REVERSION
2) Management
- Integrity and openness are the most important
- Avoid questionable or untrustworthy management
- Meet them, if possible several times (first impressions may be misleading)
- Has detailed knowledge : Strategically, operationally and financially
- Are management and shareholders interest aligned?
- Do their trades conflict with or confirm their statements?
- People rarely change…
3) Shares
- Every stock you own should have an investment thesis
-Test investment thesis regularly and if no longer valid, sell
- Look at a share price the same way you’d look at buying the whole business
- Forget the price you pay, take a loss to reduce future opportunity costs
- Keep an open mind and know the 'counter' thesis
- Think in terms of conviction rather than price targets
4) Sentiment
- Sentiment is the stock market's extra dimension
- The stock market is both a weighing (time-value) and voting (short term) machine
- In the shorter term, perception is very important
- Sentiment extremes suggest major opportunity or risk
- Stand your own ground but also listen to the market
- Not what you know, but what you know versus what everyone knows
- How many people have already heard this story?
5) Portfolio
- Position size should as much as possible reflect conviction
- Portfolio should be close to a start from scratch portfolio (if you were to start from scratch)
- Don’t pay too much attention to index weights
- Make incremental rather than large moves
- Never become emotionally attached to a holding
- Investment is an odds game and about making fewer mistakes
- Sell if the investment thesis is broken, you lose conviction or you find something better
- Compare new holdings against existing. which is more attractive?
6) Risks
- Win by not losing too often or too much
- Poor balance sheets drives main source of mistakes
- One loses the most in these companies when business deteriorates
- H- Scores or Z-scores (Company watch)
- Look at a stock differently if it does well for several years
- Avoid 'Pass-the-Parcel' stocks, e.g. momentum. Don't be the last one holding
- Poor management and poor business franchise are also risky
- Not just debt, look at pension deficits
7) Financials
- Read the original company documents for important news (IPO and Rights Issue documents are verified)
- Look at the notes to the accounts
- Models are only as good as their assumptions
- Dislike capital intensity
- If in doubt, follow the cash
8) Valuations
- don’t look at only one valuation such as P/E
- Newer valuation methods
- PEGs and Dividend discount models can be misleading
- As bull market progresses, valuation method can become conservative
- Never forget absolute valuation
- Look at today's valuations in context of at least 20 years of history
9) Technical Analysis
- The first thing is the share chart
- Cross check fundamental views
- Find an approach that works for you and use it consistently
- More useful for larger stocks
- Run profits, cut losses
10) Information Sources
- Use brokers
- Meet face-to-face
- Use lots of inputs
- Choose a delivery system (hardcopy/online)
- Use non-broker research e.g. consultants, specialists
- Balance monitoring what you own with working on new ideas and prospects
11) Market timing
- Consistently successful market calls are very difficult to make
- Market is a excellent discounter, anticipates events
- Need to be contrarian to successfully time the market
- Use patterns of history; valuations and sentiment
- Don’t just use economics and think about how your view differ from consensus
- Be most on your guard after a long upward move of four to five years
- Investing is generally for 3 years plus

Eric Tan,
London

US non-farm payrolls: Employers cut 467,000 jobs in Jun

So, given the government stimulus so far, it looks like employment is still weakening and consumer deleveraging, crimping demand.
Reflation efforts by governments worldwide helped boost risky assets such as commodities and equities in the last 3 months and in the process trashed treasuries and bonds.
10-year US benchmark rates rose from 2% at the start of 2009 to a peak of 4% last month, despite the Fed announcing plans to maintain its purchase plans.
Popular belief has it that the negative sentiment is drawn from the potential indigestion of a trillion more dollars of issuances bound for the doorsteps of willing investors in the coming year.

Scenario:
Say Bernanke's "green-shoots" of recovery was stunned by the high oil prices and the economic recovery widely expected by the end of this year doesn't materialise, we could once again face the swings of the oil price cycle and see bond yields revisit the 2% levels.

Eric Tan, London