Being an ardent follower of Warren Buffett, I truly believe in and practice 100% of value investing.
I mainly look for and consider two type of investment opportunities:
- wonderful companies at fair prices (much preferred); and
- fair companies at wonderful prices (only if the prices are superbly wonderful).
In an ideal world, I would want my portfolio to consist of a handful of wonderful companies, which I can foresee myself owning them happily for the next 5 to 10 years (or more if their competitive advantages and strong fundamentals remain), and grow my wealth together with their operating earnings per share.
I personally prefer a relatively concentrated portfolio, as I believe that a lack of concentration of mind is riskier than a lack of diversification of assets. Another benefit that I see from a concentrated portfolio is that, with the depth of analysis for each company, I would be able to learn much, improve my knowledge and deepen my circle of competence over time. However, I do acknowledge the risk from a concentrated portfolio and will therefore tread cautiously. As of now, I am aiming for a portfolio of 8 to 15 companies.
To expand more on what I consider as and look out for for wonderful companies:
- high ROA and ROE, ideally at least 15% or more (this is probably the most important factor);
- much reinvestment opportunities to deploy incremental capital at similar/greater returns (this would be the ideal situation – however, I am willing to own companies with less reinvestment opportunities, provided that the price is relatively very cheap);
- strong and durable moats;
- low leverage (I want to be able to sleep happily at night and know that my companies will survive during downturns);
- high profit margins (to cushion the impact from heightened competition/ price wars during times of oversupply relative to demand);
- good industry economics (the reputation of the business usually triumphs the reputation of the management);
- decent/good management, with honesty, considerable stakes in the company (alignment of interest) and good capital allocation behavior (prudence and focus on shareholder value);
- decent/good corporate governance;
- exposed to risks that that are well justified and compensated by the rewards (based on the price paid);
- reasonable valuations (another most important factor); and
- last but not least, simple businesses which I can understand and ideally in my circle of competence.
I believe that an investor’s investment philosophy and style will definitely change over time. I look forward to those in the times to come, but so far I believe that these principles would fare well for me at this stage.