The Long-Term Value Strategy: Selecting High-Quality Companies for Superior Returns

My investment philosophy is centred on the pursuit of superior long-term returns while maintaining sound risk management.

This philosophy integrates rigorous analysis of intrinsic value, quality of business, and investor behaviour:

Core Investment Tenets

My investment approach synthesises the writings of great money managers such as Warren Buffett, Charlie Munger, Benjamin Graham, John Templeton, Philip Fisher, Seth Klarman, Nick Sleep, François Rochon, and Peter Lynch.

1. Long-Term Orientation and Value:
   • I believe that over the long run, stocks are the best class of investments.
   • The fundamental principle is that, in the long term, a stock's market performance will eventually echo the increase in the intrinsic value of the underlying company (usually linked to the return on equity).
   • I consider myself an owner of the companies in which I invest, focusing on their growth in earnings and long-term outlook rather than short-term stock price fluctuations.
2. Stock Selection Criteria (Quality Businesses):
   • I favour companies with solid balance sheets and dominant business models.
   • Key characteristics of a high-quality company include:
     • Strong (and sustainable) margins and high returns on equity (ROE).
     • Low level of debt and use of conservative accounting.
     • A sustainable competitive advantage that allows it to maintain superior returns on capital over the long term compared to competitors.
     • A durable business model that is more immune to technological and other transformations inherent in the capitalist world.
     • Management that is brilliant, honest, dedicated, and altruistic.
   • I avoid risky companies, such as those that are non-profitable, have too much debt, exhibit high cyclicality, or are run by ego-driven people.
3. Valuation and Market Behaviour:
   • Once a company is selected for its exceptional qualities, a realistic valuation of its intrinsic value must be approximately assessed.
   • I believe in the "margin of safety" principle, derived from Ben Graham and Seth Klarman, which requires being conservative in analysing a company’s future potential and estimated value.
   • While quality companies often trade at a premium, the higher the premium, the greater the risk (e.g., a stock trading at 40 times earnings is riskier than one trading at 20 times).
   • I recognise that the stock market is often irrational and unpredictable in the short term, being dominated by participants who treat stocks like "casino chips". This irrationality, however, is my ally because it allows me to acquire superb businesses at attractive prices (well below their intrinsic values).

Risk Management Framework

I operate with the understanding that the analysis of risk must be carefully considered and nuanced, relying on judgment and experience more than complex mathematics or algorithms.

An equity portfolio's risk is determined by four distinct levels:

1.      Portfolio Diversification: A portfolio of about twenty securities is recommended, as it represents a good balance: reducing the risk associated with too much concentration while increasing the probability of doing better than the average market return. Having too many stocks concentrated in the same sector (e.g., high-tech) does not represent adequate diversification. My own philosophy is to hold an even more concentrated portfolio of 5-10 high-quality businesses. This allows me to dedicate more time to doing proper research while maintaining my 9-5 job.

2. Quality of Businesses (The most important parameter): Risk is reduced by holding high-quality companies, as described above (low debt, strong ROE, durable business models, and competitive advantages).
3. Stock Market Valuations: Higher valuations increase portfolio risk. Purchasing companies at reasonable valuations is necessary to apply the "margin of safety".
4. The Investor’s Own Behaviour: This is often the worst enemy for investors.
   • It is vital to avoid being distracted by politics or attempting to predict the stock market.
   • The level of risk decreases as the holding period increases. The longer you hold a security, the greater the probability of a correlation between the stock market performance and the intrinsic performance of the company.
   • Conversely, the more an investor trades, the more the risk of the portfolio increases.

In sum, my investment strategy is compared to running a marathon, where the first rule is to run in a way that allows you to finish. You seek superior returns, but never at the cost of taking undue risk.