Share Portfolio Management
Australian Share Portfolio Management
To succeed as a share investor you need a philosophy and a strategy. The philosophy required is to know how to think about the stock market, and the strategy is to know how to value a business.
Fortunately investors can take guidance from the world’s greatest investor – Warren Buffett. Starting with nothing Buffett has amassed a fortune of more than US$50 billion through share investing, the bulk of which he is giving to the Bill & Melinda Gates Foundation. Buffett has been equally generous to investors, freely explaining his investment philosophy and strategy.
So how should an investor think about the market? “Investment is most intelligent when it is most businesslike”. According to Buffett, these are the nine most important words ever written about investment.
Buying a share means you become a part owner of a business and, if the business does well, you do well. Therefore focus on the operating progress of the business, not its daily share price.
The essential thing is to get your money’s worth. Buy today if the value is there. Don’t wait in the hope that the price may be cheaper at a later date. It may not.
“If you aren’t prepared to own a stock for 10 years, don’t even think of owning it for 10 minutes”,says Buffett.
A funny thing happens when you invest long-term (ten or more years). You begin to think long-term. You focus on the essential items. The ever present market hype, which ultimately has little bearing on your investment outcome, becomes irrelevant.
Another Buffett principle is to ignore the market. The market is there to serve you, not instruct you. The true investor welcomes volatility. Look upon market fluctuations as your friend, and use the opportunities they offer to your best advantage.
It can take considerable willpower to ignore the market’s herd mentality and behave rationally: to keep your head when others are losing theirs.
But if you truly want to be a successful investor, you must embrace this one simple truth: Day-to-day (or even month-to-month) fluctuations in the share market do not make you richer or poorer. Only changes in a business’ intrinsic value can actually do that.
So how do you value a business?
Value investing is based on the belief that there is an objective, determinable value for any investment, which is independent of the stock market. This is known as intrinsic value.
From a value investing perspective, intrinsic value is defined as ‘the discounted present value of all cash that can be taken out of a business during its remaining life’.
The power of this simple formula must not be underestimated. It effectively allows all investments – be they shares, property or fixed-interest to be reduced to a common valuation base.
Value investors use government bonds as this common valuation base. After all, why invest in something if its return is not at least equal to that of government bonds?
The keys to identifying businesses to apply this formula are enduring competitive advantage, high return on capital, honest and able managers. Only invest when you have a ‘margin of safety’, ensuring you are getting more in value than you are paying.
