Wednesday 26 February 2014

Yeoman 3-rights value investing

On market timing
Yeoman de-emphasize market timing, market sentiment, and macro views from politicians or central bankers. Macro views are like the views taken from a helicopter, flying high over the jungle. We, being bottom-up securities analysts, are like the ants and the squirrels on the jungle floor. The view on the jungle floor is vastly different from that of a helicopter.

Importance of staying focus
The managers of the underlying business of the stocks we've selected stay focused on what they said they would be doing. We don't like companies that zig and zag and try this and that. We like simple-to-understand and focused businesses and owners who stay focused.

We call our investment process the "3-Rights" (Right Business, Right Price and Right Management). Subject to the 3-Rights criteria being met, we are usually fully invested holding little or no cash. For us, performance attribution is from securities selection and portfolio construction, not market timing. We apply the private business approach and ported it to the public world. We look for businesses with the right economics, that are undervalued relative to the assessed merits of the business, and they must have management that are able to safeguard the interests of shareholders and ensure that the hoped-for benefits eventually accrue to us.

Value and share will eventually converge
If we get the '3-Rights' right, time is our friend. In the short term, price and value may not converge but over the longer term they surely must

Business like investing
If we have the comfort of time on our side and the stocks that we own are backed by real businesses generating adequate earnings relative to our price at entry and the cost of the company's capital employed, then we are getting richer by the day, no matter where the market goes

Diversification is the key
The maximum exposure to a single stock is about 1.4 per cent. And it has tremendous defensiveness. If something doesn't work out in one stock and we suffer permanent and total impairment, we would have lost 1.4 per cent. But if the remaining stocks work out, and typically we pay 50 cents on the dollar - that is, we assess that the stock is worth $1 and we pay 50 cents - ... the loss would be more than covered.

Invest only when there is undervaluation
Undervaluation is the prime and only motivation for investing. If we can't get undervaluation, we don't participate.

Importance of margin of safety
A lot of people spend time picking that one winner that makes a killing. We think that's best left to the person with a strong imagination. As stewards of other people's money, we can't take liberties. As we work on probabilities, this method of investing is very good. The reward is maximised through the '50 cents on the
dollar' approach. Value will be realised at some point. Should something come up to hurt us, the loss is well contained.

No comments:

Post a Comment