DETTA INLÄGG ÄR ETT UTDRAG UR KVARTALSBREVET JAG SKICKADE TILL PANDIUMS ANDELSÄGARE 31 JULI 2014.
Since the Fund has recently been launched it might make sense to elaborate on our investment strategy. It will hopefully give you comfort when the market becomes more turbulent, but also enable you to, at any point in the future, check if we have stayed true to our strategy. If we start to drift and speak of technical analysis or swing trading, you will know it is time to redeem your money. The strategy is governed by the following principles:
1. We are value investors
Being a value investor means a couple of things. We are fundamental investors, which means that we regard stocks as part ownership of companies and evaluate them based on their merits as such. We look for simple businesses with good prospects that are run by honest and capable managers. We then only invest when the price is significantly below the estimated value, promising both downside protection and upside potential.
2. We are risk averse
If you lose 50% you need to make a 100% return just to get back to square one. An investor’s first priority should consequently be to not lose any money. That is why we look at the downside before we look at the upside when we evaluate opportunities. If there is any likelihood of a, partial or full, permanent loss of capital we are not interested.
We use different methods for managing risk. Our main tools are extensive research in each individual investment case combined with a margin of safety. Further, we compose our portfolio so that we are diversified between different risk exposures. We also use hedging when appropriate and keep some cash at hand.
Our risk averse approach is the reason we have chosen to not use leverage or short selling.
3. We are long-term investors
In the short-term market prices are determined by changes in supply and demand and highly susceptible to investor sentiment and expectations. But long-term price changes reflect the fundamental development of the underlying companies. So, if you can correctly analyse a company and its prospects you might make money if you are willing to wait. That is obviously much easier than to try to analyse the supply/demand dynamics of the stock market.
Further, we are in it for the long-run and it would not make much sense to be too bothered about random short-term price fluctuations. Especially since there is an upside in being long-term. Because, in a market that has become increasingly short-term orientated, there are attractive opportunities for investors that are willing to adopt a long-term view. Those include for example companies with solvable short-term problems. A fund manager too concerned with the next quarter would have to wait until the problems are solved. But then the price will be higher. If you do not have to worry about the short-term price movements you can buy it at much lower levels.
4. We select stocks bottom-up
The most common question we get is: what do you think about the market, what will it do next? The answer is that it will go up and down, but not necessarily in that order. Peter Lynch described market forecasters best: there are those who do not know and those who do not know that they do not know. We belong to the camp that does not know.
The market development is important, but you need to differentiate between what is knowable and what is unknowable. There is no one that has been able to repeatedly make money by predicting the market. Not only do you have to guess what will happen and when, you also need to be alone in that prediction, otherwise the information will be priced in. It is just too hard. For that reason we approach the market bottom-up. We search for individual companies that meet our requirements and do not spend any time trying to forecast the market.
5. We focus on our best ideas
There are several reasons why we believe that it is wiser to have a concentrated portfolio of holdings than a large diversified one:
- Diversification does not address the risk that will probably have the most effect on your portfolio, namely market risk. If the market drops significantly the number of stocks in your portfolio will not matter much, they will likely all go down.
- The value of diversification for handling nonmarket risk quickly goes down after 8-10 holdings in different industries.
- The more diversified your portfolio is the more it will resemble the index. As the resemblance with the index increases your chances of overperforming it decreases.
- If you set a high bar for what investments you are willing to do, as we have done, there will be a limited number of possible investments.
6. We are contrarian
According to Baron Rothschild “The time to buy stocks is when there is blood in the streets”. Although overly graphic it describes one of the most important rules of investing. Successful investing requires that you go against the herd since popular securities are almost never undervalued. You are more likely to find undervalued stocks among the unpopular, ignored and obscure ones.
The problem with being contrarian is that it is not easy. Buying the stock of a company that everybody else is saying is heading for zero requires you to be certain that you are right and everybody else is wrong. Nevertheless if you have done your homework the rewards can be substantial. We therefore actively search among the companies that everybody else has discarded.
 Given that the market volatility was at it lowest point since 2007 in June it is likely that the market will become more turbulent in the future. We just do not know when.
 Those of you that have studied finance know that this conflicts with the Efficient Market Hypothesis. It states that all market prices reflect all available information at all times and that all efforts in trying to beat the market are futile. Someone forgot to tell Warren Buffett.
 We are allowed to short sell stocks we own for hedging purposes.
 We owned them while running the private investment company Pandium Partners AB.