As Buffett once said, when asked about his criteria for hiring: “The behaviour of the people who run the business is absolutely critical. We look for three things in a person: intelligence, energy and integrity. And if they don’t have the last one, don’t even bother with the first two.”
We are often asked how we decide on our stock picks, our approach or method in investing that we apply for our portfolios. Do we randomly pick stocks or from news, articles and research reports, or is it simply luck? What is our investing philosophy? Rather than answering in a purely theoretical approach — you can read up on most of the guiding principles in the many books written on the subject, such as the classic The Intelligent Investor by Benjamin Graham (which Warren Buffett has called the best book ever written on investing) — we thought it would be more useful to show how they are applied in our actual stock picks. We will do this over the next few articles.
We are trained as analysts. So, obviously, we are inherently biased towards stocks with strong underlying fundamentals — cash flows, balance sheet, earnings and growth prospects. Fundamental to our belief is that stock valuations are based eventually on the sum of the company’s future discounted cash flows, though shares can and do trade above or below this intrinsic value in the shorter term. And, of course, the intrinsic value itself is not static, changing as beliefs and expectations shift. We analyse the macro and industry trends and how they affect a company’s revenue growth and margins, its ability to generate positive cash flow, financial health (debt levels) and resilience during downturns, the strength and sustainability of its competitive advantages and so on. But above all, we value management integrity and capability — the qualitative factors we think are more critical than any mathematical calculations of intrinsic values.
