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-Test investment thesis regularly and if no longer valid, sell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