Investment Strategy

As I commented in the investment philosophy, every investor will have its own way of computing the intrinsic value of an asset. As a consequence there is not one way of doing Value Investing, but a myriad of possibility.

I personnally focus on investing in companies with the following characteristics:

• An asset light business model
• Decent growth potential, either organically and/or through acquisitions
• A sustainable moat
• Customer stickyness, or the ability to generate recurring revenues
• A management with a proven track-record of creating value for shareholders
• And obviously a reasonable valuation level. A corollary to that is that I invest only in profitable companies

I am looking at investments with a 5 year horizon. However this limitation is mainly due to the fact that, in a fast-changing world, it is extremely difficult to forecast how a business will have changed above this timeframe. That being said, I would be very happy to own a business forever as long as I believe it can keep on generating outstanding returns. 

Typically, the reasons for exiting one of my investment will be one of the following:

• Valuation fully taking into account the potential of the business
• Possibility to re-invest the proceeds into an investment candidate with significantly higher upside potential
• A take-over of the company
• Having lost faith in the company management
• My investment thesis becoming obsolete

For now, my hunting ground for investment ideas is Europe, i.e. companies with their headquarter and their listing being in a European country. There are plenty of companies which I still need to look at here. I have also started digging deeper into the North American market.

I may look at emerging countries once I consider having a good understanding of my core markets.

I am fairly sector agnostic as long as I am able to understand how a business is working. In hindsight, I can say that my favorite investment universe tend to be Software, B2B Services and MedTech. Conversely, some sectors I won’t invest in are Financial Companies (Banks, Insurances, Funds and other Holding), Biotech (i.e. pharma companies with no operating activity outside of their research) and some segments where I understand neither the technology nor the value proposition (e.g. Blockchain or Electrical batteries).

I will also exclude or be extremely restrictive (i.e. ask for a very low valuation) with many businesses which I think are “not in control of their destiny”. Some example of that are:

• Companies linked to a commodity price: e.g. in Mining or in Oil & Gas. The only interesting candidates in this case are the one with a significant cost competitive advantage
• Companies subject to political & regulatory risk: banks and insurance companies are subject to tremendous regulatory change risks. Another example would be renewable energies, which for very long could only be installed because of subsidies. This is changing now as we are reaching grid-parity
• Companies subject to strong technologic disruption: this is the case for a lot of media companies, brick & mortar retailers and for the paper industry, which are all being disrupted by internet and the digital era

Finding good companies to invest is difficult. But finding good companies at an affordable price is even harder ! The amount of good opportunities fluctuates a lot with time. It is easy to find great opportunities during a market crash because prices drop while value change very little, thus more companies trades with a margin of safety. Conversely when the cycle has progressed, even low quality companies start to be priced very highly.

As a consequence, I am very happy to run a concentrated portfolio. I expect the number of companies where I am invested in to be between 5 and 20 companies. If I can’t find any good idea, I will rather keep some cash. Finally while I will usually not allocate more than 20% to a particular idea when building up the position, I do not intend to sell down a position just for re-balancing the portfolio. Therefore, if a position represents 40% of my portfolio but I still see a very high upside potential, I will just keep it.

The conclusion is that if I want to have 10 companies in average in my portfolio and keep them for ca. 5 years, I will only need to find 1 or 2 new investment idea every year. Furthermore I am expecting my portfolio to be more volatile than competitors due to the higher concentration.

As a comparison, a normal Mutual Fund is required to invest in at least 30 companies. Many funds have more than 100 positions in their portfolio. And the average holding period of stocks on the market, based on Ned Davis research, is only 8,3 months. This implies that traditional fund managers will usually invest in 140 ideas per year.