Value Investing means long-term success
We are Value investors focusing primarily on family businesses. We seek out the best investment ideas and do not care much for a reference index. Our Asset Managers analyse equities by calculating their intrinsic value in a conservative manner. We will only buy cheap companies, which quote at a large discount and thus offer a significant upward potential.
We prefer family businesses
We prefer to invest in companies which are partly owned by a family or by directors who have a major portion of their net worth invested. This is a kind of guarantee that managers or reference shareholders who have their eggs in one basket that they are dedicating most of their time to manage the company for long term success.
Long term vision
The share price of a company must offer a sufficiently large discount versus its intrinsic value. We exploit the fact that the stock market is inefficient in the short term, but that in the long term the share price will evolve to match its intrinsic value. We therefore often adopt a contrarian approach, preferring to buy in depressed markets and sell when stock markets are trading above their intrinsic value.
The stock market as a market
We are convinced that the stock market is inefficient. Share prices in the short term are strongly influenced by emotions like fear and greed. We do not have a chrystal ball. We do not make predictions on the short term evolution of share prices. We use the stock market primarily as a marketplace to buy shares that are trading at a large discount on their fair value and we sell shares that have reached their target price. We won't adjust the intrinsic value of a company to the evolution of its share price unless there is a fundamental reason to do so.
Founders of Value Investing
The foundations of Value Investing were laid by Benjamin Graham. He wrote a number of masterpieces, including “The Intelligent Investor” and “Security Analysis”, the latter with David Dodd. It was Graham who taught Warren E. Buffett, no less.
Warren Buffett and his partner Charles T. Munger achieved an average annual return of 20% from 1965 until the end of 2020 through their investment vehicle Berkshire Hathaway. Over this timespan of 56 years, Berkshire's book value grew from USD 19 to USD 287,031, a return of 1462,231% compared to an annual stock market (S&P 500) growth of only 10.2% or 23,454% over 56 years. That is the power of compound interest and the power of ... a long-term view.
In the ordinary common stock, bought for investment under normal conditions, the margin of safety lies in an expected earnings power considerably above the going rate for bonds.Benjamin Graham
At Value Square, we give due consideration to ensuring a balanced portfolio in order to spread the risks. This means that we will not often invest more than 5% of a portfolio in a single share.
Value is often considered to be in direct contrast to Growth. At Value Square, we do not regard these as opposing concepts. Admittedly, growth shares are more sexy, they receive greater media attention and they appeal more to the masses. This has the side effect that their market valuation is often correspondingly high. Growth shares are rarely cheap, unless you buy at bottom prices at a time when the stock market is out of favour. The share analysis in recent decades has shifted more and more towards an estimation of future earnings.
At Value Square, we also use a growth model for most industrial companies. However, we tend not to look much further into the future than 2 to 3 years. Making 10 year predictions regarding the profits of a particular company makes little sense and increases the chances of miscalculating.
We also use conservative estimates of the earnings and of the intrinsic value. Even with growth shares we require a large discount on the intrinsic value. We even prefer to buy growth shares on the condition that they are also Value shares.
The Margin of Safety
Value Square Asset Management operates according to a specific system where an intrinsic value is calculated for each share in our investment universe according to conservative estimates. A recommendation is then formulated based on the potential return and taking into account the risk profile. We do not feed any emotional variables into our model.
A great many experienced investors agree that the purchase price of an investment is extremely important. By buying at a price that is cheap compared to the intrinsic value, you protect yourself with a certain margin of safety.
Suppose you have a share with a price-earnings ratio of 10, the earnings yield or earnings capacity is then 1/10 or 10%. When the interest on 10-year government bonds is 4%, this share benefits you to the tune of 6% (10% - 4%) per annum. This assumes that the profits of the company in question remain at the same level and do not grow.
Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favourable business conditions. The purchasers view the current good earnings as equivalent to “earnings power” and assume that prosperity is synonymous with safetyBenjamin Graham
Focus on quality
The problem is that the majority of investors only rush to act once the stock market has already rallied significantly. The masses only tend to start buying shares after reading jubilant reports about the market (example: “The Stock Market reached a new record for the seventh day in a row”), or if their neighbour gives them a free tip-off. What often happens in such periods is that shares of rather dubious worth with little or no track record come to the market.
At Value Square, we pay special attention to the quality of a share or bond. We give each share/bond a quality score and impose internal requirements on the quality of your overall portfolio. We prefer that the capital works for us and that the compound interest formula does its job rather than invest in shares that carry a high risk, without profits or dividends.
In-house funds based on the principles of Value Investing