I started practicing value investing in 2013. Before that I read most of what I could find on the subject from Benjamin Graham, Seth Klarman, Joel Greenblatt, Howard Marks, Bruce Greenwald and others.
CAGR (Compounded annual growth rate): 16,86%
General investing priorities:
My overall theme is protection of principal. If you limit your downside the upside will take care of itself. I look at asset valuation and earnings power valuation and would like to have margin of safety on both.
1. The preferred choice is a company with good upside based on value of assets combined with good average historic returns on equity. Good long term growth of equity per share should also be present. These are usually companies with temporary problems internally or are affected with macroeconomic circumstances that are short term.
2. Second choice would be to look at very cheap assets with positive equity per share developments over time. The profitability is often low in these cases. But with great margin of safety on assets an increase of the earnings power can really give the company a move in market valuation. Until that happens the increase of equity per share drives the market price in a positive way, provided that the return on equity is stable and market valuation of price per book reamains the same.
3. Third choice would be to be in cash until above opportunities occur.
A combination of the three is often present in my portfolio and the allocation between the categories changes depending on where I see the most potential.
Quote from Seth Klarman in "Margin of Safety":
…perseverance at even relatively modest rates of return is of the utmost importance in compounding your net worth. A corollary to the importance of compounding is that it is very difficult to recover from even one large loss, which could literally destroy all at once the beneficial effects of many years of investment success. In other words, an investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes even spectacular gains but with considerable risk of principal. An investor who earns 16% annual returns over a decade, for example, will, perhaps surprisingly, end up with more money than an investor who earns 20% a year for nine years and then loses 15% the tenth year.
There is an understandable, albeit uneconomic, appeal to the latter pattern of returns, however. The second investor will outperform the former nine years out of ten, gaining considerable psychic income from this apparently superior performance. If both investors are money management professionals, the latter may also have a happier clientele (90% of the time, they will be doing better) and thus a more successful company. This may help to explain why risk avoidance is not the primary focus of most institutional investors.
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