I distinguish importantly between investing and trading. Trading is holding stock for less than two years and is not an activity I engage in. My definition of investing is aligned with that of Warren Buffett, investing in a share should be regarded as buying a part of a business. As a co-owner of the business, my behaviour typically changes towards that business. As an example, because I own shares in Clover, I preferentially select their products in the supermarket, just like any business owner would do.
Again leaning on Warren Buffett’s philosophy, investments should be made with a very long term time frame in mind. Buffett thinks that a share should be bought under the assumption that the stock market is closed for the next ten years and we could therefore not sell the investment for that period. Preferably stocks are held forever, but I personally sell shares, when my original reason for the buying the business has changed.
For instance, I own shares in Clover, because they are a company with a strong brand in perishable consumer goods, with an excellent supply and logistics chain, and a fundamentally strong growing consuming market in Southern Africa. If Clover were to open a European business, acquire a packaging company or expand into meat products, I would have to consider whether my original reasons for owning the company are still applicable. If they are fundamentally changed, I would sell.
Finally, I focus on what I can control. Macroeconomic policies, the state of the economy, politicians and forecasters are all outside my control. Choosing investments in businesses that are not affected by these factors is something I can control and that is why my focus is well and truly bottom-up.
I therefore select investments by asking myself the following questions:
- What are the long term fundamental growth prospects of the business? What future trends underpin this business?
- Is the business exposed to Africa’s growing population and economic growth – the one unique investment opportunity for investors in the JSE?
- Do I use the company’s products or do I use a competitors?
- What are the barriers to entry? Does the business have a competitive advantage?
- Is the business boring, steady, consistent? If I want excitement, I will go to a sports game.
- What is the valuation of the business? Am I paying a fair price for future earnings and cash flows?
- To what extent is management invested in the company?