Read, Read, Read
We are voracious readers at GreensKeeper. Investment knowledge is cumulative and learning about different industries, trends and history helps us to connect the dots and spot opportunities.
Some of our favourite sources include: The Wall Street Journal, Financial Times of London, Globe & Mail, Barron’s, Bloomberg, The Economist, Value Line, Annual and Quarterly Reports, and TED talks.
Interesting ideas come from many places. In addition to our daily reading regimen, we utilize proprietary stock screeners and other high-quality sources to look for stock ideas. Our goal at this stage is to identify situations that look attractive on the surface, but require further study.
Next, we begin our very thorough due diligence process. This includes reading historical annual reports, regulatory filings, media reports, and speaking with executives at the firm. We require a deep understanding of the company, its management team and its industry before investing our clients’ capital.
For a company to be investable, it has to pass three tests:
1. Do we understand the business?
2. Does the business have attractive economics and a durable competitive advantage (or “moat”)?
3. Is management shareholder-friendly?
Margin of Safety
If a stock passes our three investment tests, we then calculate the stock’s worth or intrinsic value. We only buy when we believe that a stock is trading at a significant discount to our calculation of its intrinsic value. In other words, we demand a large margin of safety to protect and preserve our clients’ capital. Buying cheap usually leads to attractive long-term returns even if things don’t work out exactly as we expect them to.
If a stock that passes our tests isn’t cheap enough, we simply monitor it and wait for our opportunity. Extreme patience is required.
Wait and Monitor
A crucial component of value investing is patience. To see buying opportunities for what they are and to have the temperament to weather the storm in exchange for higher long-term returns in the future. This approach also minimises capital gains tax and transaction fees. We monitor our positions to determine if we find a stock we like more (ie. we think there is a better return profile), or if the stock reaches our intrinsic value estimation and we see more downside risk, than upside potential.