Investment Approach

Value Investing

Some of the most successful investors throughout history have practised value investing. Some of them you might know of such as Warren Buffett while others you might not have heard of before, such as Sir John Templeton. They have both generated significant returns of over 15%-20 per annum to their investors.

There are some variations to how a value investor approaches the market, but the most important aspect is that you are trying to measure the current and future cash flow of any business you invest in. The cash flow is just another word for how much cash the business is generating each year. The reason for this measure is that rather than owning a stock like any other and hoping that it will go up in price, we are evaluating how much money we will receive back from this investment.

Then this amount is discounted into how much that is worth to me today, and if the stock is selling at a higher price then I will not buy it, if the stock is below this value (which is also often referred to as the intrinsic value of a company) I will then consider buying the stock. This approach can be extremely lucrative if done right. An anecdotal example of that is the acquisition of Sees Candy that Warren Buffett did in 1972. He paid $25M for the whole business at that time. 

The business has since generated over 8,000% returns and paid out over $2B in pre-tax earnings to Buffett over this period. That represents payments of 80-times the money that he originally invested. Therefore, it is easy to see why we believe that investors should be invested in and be attracted to this way of investing in general.

Above we discussed the cash flow of the business as something important for what we estimate the value of the business to be. A few other things are also important for us when evaluating investments, in addition to the cash flow, and that creates an even further layer of strength for the business over time.

  • Businesses that have a strong ability to protect their current position in the market. This could be because of their geographic dominance, their infrastructure, their brand, or the uniqueness of a product that is very difficult to replicate.
  • Businesses that are not geared too much and that do not require significant leverage to generate profits. Too much debt tends to be an issue during certain parts of the economic cycle.
  • In addition to generating strong cash flows, we also want to see that the return on the capital that is deployed is high and continues to be high. This indicates that management capacity to invest the cash it generates in the right projects to continue to grow the business and to continue to generate a strong cash flow is high.
  • The stronger base of recurring revenue that a business has the better since this result in a more stable and more easily evaluated future income profile.
  • Strong ability to use or to protect against innovation from the competition, especially technological innovation.

Liquid Investment / Market Investments

The liquid part of the Fund’s portfolio will invest in stocks (and potentially other issues) that are listed on an exchange which creates the possibility to buy and sell them daily. The opportunity for daily transactions we are not interested in per se, but the opportunity to access a wide range of investment opportunities creates possibilities. 

We will be looking to invest in businesses that fulfil our value investment approach on a global basis. The benefit is that while a certain market (like the current market in the US in Feb 2021) is very highly valued, there are other markets in Europe for example, but also elsewhere, where listed stocks as an example are much cheaper, in some cases as much as 65% or cheaper.

The reasons for this are many, but often it comes down to liquidity in the market, trends (like sustainability, technology or electric cars), country-specific political and other issues, and also potential economic factors such as inflation, employment, interest rates and currency fluctuations that will drive the value of businesses operating in this geographic area.

As we have described throughout this page our ambition is to not be carried away by every investment fad out there, but rather focus and be disciplined about our investment approach in buying great businesses to the right price. There are around 30,000 listed stocks around the world, and a lot of these are not even followed by analysts. This creates big opportunities to find exciting and great businesses when you do your homework.

Private Company Investments

As there are companies trading on stock markets that provide good value and great opportunities for investors we also have companies that are not listed as of yet. These companies also change ownership but it is a very different process where an investor will normally buy a larger portion of the company. So instead of buying a small portion of listed stock, with a private company, it is not uncommon that an investor acquires 50%-100% of the company in question.

 This requires a very different process where different types of advisers like, accountants, lawyers, investment bankers etc., are engaged in the buying process.

The benefit that we as investors will have in this type of investment is that the prices points are very different from the stock market.The reason for this is simply that since these businesses are smaller and there is less liquidity when you own a private company this is perceived as a higher risk. 

The benefit that we as investors have is that the universe of companies available in the market is significantly larger than in the public markets. There are around 21-million SMEs in Europe to start with, which represents a significant market opportunity. When it comes to the private acquisitions of companies, the Fund will limit its efforts to Europe.

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