Investment Philosophy

My investment philosophy is the one of a value investor. This philosophy was developped by Benjamin GRAHAM and explained in detail in his book “the Intelligent Investor” in 1949. It was then widespread by his disciple Warren BUFFETT.

There are several take-home points in this philosophy, but if I were to sum-up the two most important ones, it would be the following:

• “Investing is most intelligent when it is more business-like”. There are tons of meaning to this sentence and all are important
  • When investing, you should care more about the business, and not just about financial figures
  • A business is evolving over several years. Similarly, investing in a company should be done over a similar time-frame (not just 6 or 12 months)
  • When you do business, you take an active stance. Similarly, when doing an investment, you should see yourself as an active owner of the company. Not just as a free-loader
  • Investing is a business, thus as such, it needs time, dedication, business sense and processes to be done correctly. Otherwise this is only speculation
•  “Price is what you pay, Value is what you get”

Value is at the cornerstone of Value Investing. The value of a business is a measurement of how much a business is worth intrinsically. This is a personnal measurement as well, i.e. two different investors will likely never come out with the same value for a business. Value is very different from Price, as the price of an item can be significantly above or below its value.

If the price of an asset is significantly below is intrinsic value, then you get what is called a Margin of Safety. The higher the margin of safety, the lower the risk is, and the higher the return on investment will be.

The principe of Margin of Safety as a risk measurement is actually at the opposite to what you currently see in the traditional asset management world. If you go to any large asset manager, the key figure they will show you as a measurement of risk is volatility. Volatility is defined as how much price is moving, usually in comparison to a benchmark. This is completely independent from the value of a business.

I am using Real Estate because I believe people are more with this asset class than with any other asset classes.

Let us assume that you find an appartment which you would like to buy and let for rent. Your assessment of the situation is that you could rent-out the appartment for a price of € 1.000 per month, or said otherwise, € 12.000 per year. You would like this appartment to have paid for itself after 10 years. This implies that the value you give to the appartment is 10 x 12.000 = € 120.000.

After contacting the owner of the appartment, you learn that you could buy the appartment for a price of € 140.000. This is above the value which you have estimated, therefore you have no margin of safety and you may lose money on the investment. You decide not to buy the appartment.

A year later the owner of the appartment is coming back to you. Due to any possible reason, he needs to sell the appartment fast and he is ready to sell at a price of € 100.000. This is close to 30% lower price than the original price proposed. You assessment of the appartment is still the same and therefore you believe that the value is still € 120.000. Now you are paying a price which is below the intrinsic value, therefore you have a margin of safety and you know the investment may generate a higher return than what you are keen on accepting.

As you can see in this example, the only risk measurement we take is the difference between the price you pay and the value you give to the asset. This is what Value Investing is about. In the case that the price is dropping significantly, a value investor will generally see an opportunity to invest, because a lower price usually implies a higher margin of safety.

Traditional Asset Managers would have presented the case very differently: for an asset manager, the fact that the price of the appartment dropped by 30% in one year means that the price of the appartment is very volatile, and therefore very risky. Therefore he would not buy the appartment.