Eurosharelab’s Investment Philosophy

This is a summary of the investment philosophy Tim has developed over more than 30 years of reading, research and practical investment experience. You may find it helpful as framework on how to think about investing.

 

Overview

Objective

Produce attractive positive, real long-term market beating returns.

Strategy

Apply a time tested, disciplined, long-term value investing approach based on rigorous fundamental research.

 

Investment Strategy

We believe that markets are mostly efficient and securities fairly valued. Sometimes however securities are miss-priced creating profit opportunities. Such opportunities occur because of irrationality or a short-term focus. Opportunities can appear in any country, industry sector or in any type of security thus we am a generalist and do not favour any specific sector or company size.

The best investment ideas I have found typically fall into three categories:

  1. Unknown – No analyst coverage and or small companies
  2. Unloved – Missed profit forecasts, sector out of favour, restructuring and financial distress
  3. Special situations – Workouts, liquidations, delistings and spin-offs

Investment Process

Identification

We identify possible investments through reading, screening and following asset managers we respect. We however, always do our own analysis before investing.

Circle of competence

We only invest in companies of which we understand both the business and the financial statements. We keep things simple with investment ideas usually explained in a short paragraph.

Company

Typical questions we ask are:

  • Is it a good business?
  • Does it have a sustainable competitive advantage?
  • High cash returns on capital?
  • Healthy balance sheet?
  • Strong free cash flow?
  • Has it got pricing power?

Management

Are they trustworthy? Are they good capital allocators? Are they good operators?

Valuation

Is the security really cheap? Why? What is the risk return relationship?

 

In summary:

We want to buy at attractive prices the stocks of good businesses that we understand and which are run by capable, honest and shareholder friendly management.

Portfolio Management

We do not believe in investing too much of my money in any one investment idea. Investing is a process with an uncertain outcome (anything is possible) and we recommend a diversified portfolio with a maximum of 5% in any one investment idea.

We follow a strict trailing stop-loss system to let winners run and cut losers as quickly as possible and re-invested in new attractive ideas.

Securities are bought when they offer an attractive discount to underlying value.

Selling takes place when we believe a security is fairly valued or if the proceeds can be invested in a more attractive position.

 

Risk Management

We define risk as the permanent loss of capital. We do not equate risk with the inevitable short-term movements of the market. And believe that buying a security that is trading substantially below its intrinsic value is the best way to eliminate risk. Only after we have limited our downside risk do we consider the upside potential of a security. We do not believe in leverage, hedging or short selling.

 

Major Update

We made a major update to our investment philosophy – We became more quantitative investor – You can read all about it in this article: Quantitative value investing deserves your serious attention