Although misunderstood by much of the investment community, there is a distinction between the price and the value of an investment. Our job is to find that difference and profit from it.
Both our investment and business philosophies are based on the power of shared goals. We prefer companies where the executives’ incentives are aligned with those of the shareholders, most often investing their own money in company stock.
It also is important that your investment adviser’s incentives align with your best interests. That’s one reason we invest our money in the same stocks we purchase for our clients.
We sell no products, and we always use a third-party custodian for your account, providing an important check and balance on the safekeeping of your assets.
Our clients benefit from that accountability and commitment to a proven investment philosophy. That philosophy is built on four tenets: value, safety, research and logic.
“Sound investing can make you very wealthy if you’re not in too big of a hurry.
And it never makes you poor, which is better.”Benjamin Graham
In theory, the value of an investment is a simple number to calculate: it is the present value of all the cash a business will generate in the future. Our job is to project cash flows, determine probabilities and value those cash flows.
In practice, identifying profitable investment opportunities often is about exploiting the mistakes of others. As the renowned investor and founder of the Templeton Funds, Sir John Templeton, said, “If you want the same returns as everyone else, buy the same securities as everyone else.”
Independent thinking is required to make money in the financial markets. It is the greed and panic of others, chasing the same securities, that creates opportunities for investors who are willing to act independently. Our focus is on logic and research, not emotion and trends. Owning the investments most popular at any moment generates a false sense of safety and ensures that an investor will be subject to the whims of the investing masses. When given the choice, we prefer the regret of a lost opportunity over the regret of losing money. That’s why we always have been willing to stand outside the herd.
We look for value, not just what’s in vogue.
Investors and advisers frequently rely on over-diversification as a replacement for knowledge. People who don’t know what to do often do a little bit of everything, giving the illusion of active management and eventually owning the entire market, either through index funds or their very expensive proxy – a collection of diversified mutual funds.
The beginning point of all sound investing is determining the value of the asset. Stocks are not numbers on a computer screen that fluctuate in price. They are ownership shares in a business. Successful investing requires examining a stock as if evaluating the business – because that is exactly what we are doing.
The business itself must be attractive. It must generate a high cash return on its invested capital. We prefer companies that generate excess cash, not consume additional capital.
If the only way a business can generate increasing net income is to retain and reinvest a growing percentage of its earnings, we are not interested.
Sound investing requires vetting the value of the business, not just the price of the stock.
Our value approach to research and investing had its genesis in the 1920s with the work of Benjamin Graham, co-author of the bible of fundamental investment research, “Security Analysis.”
Graham describes a successful investment as one “which upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Like Graham, we always are concerned about having a margin of safety in every investment.
This commitment to a margin of safety not only guides our investment decisions, but also is a part of our fiduciary responsibility to our clients.
At its core, successful investing is an act of logic that occurs in an environment of emotion.
Logic requires that our purchases are priced extremely low relative to their intrinsic value – which first requires that we determine the value of any investment we consider.
Being disciplined about the price we pay for a security provides the margin of safety we require.
Wall Street is an inefficient, emotional place – that’s why there are 10 or 20 percent daily swings in the prices of many stocks. Investors driven by emotion are afraid to stand out from the crowd. Whether they admit it or not, these investors – and they dominate the entire spectrum, from institutions to individuals – have ceded a part of their decision-making process to others.
At Moon Capital Management, our philosophy ensures that we don’t invest our clients’ money on the passing whims of the masses. Our approach often leads us to buy when others are selling and to sell when others are buying.
Some of our most profitable investments, the ones that only in hindsight seem so obvious and easy, are often the ones that required the most emotionally difficult decisions. To keep a rational outlook when the investing herd is panicking or irrationally euphoric is difficult – but can be extremely profitable.