About

Introduction

Hello, all. I am a private investor in the UK who has been interested in the stock market for many years. However, it’s only in 2016 that I have started to get involved in a serious way. The reason why I am writing this blog is to document the process and analysis that goes into my investment decisions. Hopefully, the blog will act as the sharp pencil pressed into my spine, keeping me from making poor investment decisions.

Strategy

Free cash flow focus – Wall Street may focus on earnings, bu the real barometer of success for a company is free cash flow and it is very real, unlike earnings which can be manipulated.

Avoiding excessive leverage – I have found that my biggest mistakes in investing come when I invested in companies with over-leveraged balance sheets. Like many investors, I maintain a watch list of possible investments, and I’ve noticed that down through the years, the majority of the de-listed zero’s on my watch list were companies that went bankrupt due to debt.

Avoiding companies in permanent structural decline – When you’re trying to buy value, then you’re always going to be at risk of the dreaded value trap. Unlike an over-leveraged balance sheet, it can be more difficult to identify when a company is in structural decline. Falling revenue, shrinking margins are often key indicators here.

Avoid the crowds – Seth Klarman specifically talks about avoiding the crowds in investing and identifying when forced selling creates opportunities. A lack of analyst coverage, a lack of institutional buying, forced selling due to non-business decisions, etc. – these should all be seen as possible buying opportunities.

Down-side protection – Ben Graham focused on tangible assets on the balance sheet, having a strong balance sheet is protection against permanent capital loss. When your price is a multiple of earnings, then the quality of the earnings and underlying business should be your protection.

Proven management – I find that investments perform poorly when management are not aligned to shareholders interests. Red flags for me in this regard are excess management compensation when taken through salaries and options, when management have no skin in the game, or when management go on acquisition frenzies.

Patience – Unlike funds which have to be invested in the market at all times, the private investor isn’t constrained by that requirement. When Warren Buffett talked about waiting for the “fat pitch” – he meant that investors should wait for the opportunities to come to them, rather than to go out and chase the market. Periods of mass market sell-off’s are ideal buying opportunities for investors in this regard.

Investing in value will mean that not all the above criteria will be met, but most should be.

Influences

Warren Buffett – Buffett has went through a number of iterations in his investing career, the one I identify with most is the Buffett that looks to buy stocks in quality companies that have been beaten down for one reason or another. Buying great companies, and holding them has yielded incredible returns for Berkshire Hathaway (American Express, Washington Post, Coca-Cola, etc.). These investments can become fantastic compounding machines in the long-run.

Seth Klarman – I have read Klarman’s book the Margin Of Safety several times, and each time I read it, I find I take something new away from it. The key concepts I take from Klarman are to not only focus on the upside, but also look at where you can lose money. Klarman was also one of the first to talk about the impact of institutional activity on the market. Opportunity can knock when stocks are kicked out of indices, or when a dividend is cut, causing forced selling.

Lord Lee – Not familiar to anyone outside of the UK, Lord Lee has been a long-time proponent in taking full advantage of the ISA tax wrapper in order to shelter investments from tax. His investment strategy favoured buying well-run, family-owned companies and holding them in almost perpetuity. His long-term approach enabled him to run up impressive performance, becoming one of Britain’s first ISA millionaires.