The Best Investment Approach for a Successful Fund
Investing your hard-earned money can be daunting but if done correctly it can also be a very rewarding experience.
The best investment approach for an investor is to create a portfolio of extraordinary businesses that will deliver the highest possible return a decade from now.
It’s important to understand the different investment options and strategies that can help you achieve your financial goals.
According to the WFE Statistical Portal, there were 58,200 publicly traded companies both domestic and foreign, in the first quarter of 2022.
Therefore, you do not have to swing at everything that is trading in the market. Waiting for the right deal or a company to invest in is the key to investing success.
Warren Buffet once said, for a piece of information to be desirable, it has to satisfy two criteria: it has to be important, and it has to be knowable.
The macroeconomic environment, regardless of its ups and downs, is unpredictable and often irrelevant to companies’ long-term prospects. As a result, we tend to pay little attention to them.
We try to avoid short-term noise as we think it’s distractive to long-term compounding. Because, it’s time, not timing, the market which will lead to real wealth accumulation.
Instead, we focus on the moat of the company and its ability to maintain its competitive advantage.
A moat, or durable competitive advantage, gives a company an advantage over its competitors. It will help the business maintain and increase its profit margins and market share.
For example, Amazon shares traded for $5 on the first day in 1998. The stock price had risen to $85 by 1999.
However, after the tech bubble burst in 2001, Amazon’s share price fell by 93% to $6. The majority of people would panic and sell their shares in such a situation.
Amazon’s share is now $100.56 which is equivalent to $2,011.2 taking into account the 20-for-1 share split.
How Many Shares Should You Own in Your Fund?
Some may ask how many stocks you should hold in your portfolio. Several studies have been written about this topic, but there is no right or wrong number of companies to own.
However, we own around 25 to 30 extraordinary businesses which are mostly technology companies with great prospects for growth. We think 25-30 shares will provide sufficient diversification considering that our time horizon is long-term.
Small to medium market capitalisation is preferable for great upside potential. As an example, if you invest £10,000 in a great business that compounds at a 20% rate every year, your investment will reach £1 million in 25 years.
In today’s world, Amazon or Google/Alphabet wouldn’t be able to provide that level of compounding return due to their already large sizes.
You need to look for the next Amazon now because once market capitalisation has reached a trillion dollars, it becomes very difficult to grow it at such a high rate..
Professor Hendrik Bessembinder, Francis J and Mary B performed a study on every stock on the NYSE and Nasdaq exchanges going back to 1926.
The study found that just 86 stocks accounted for $16 trillion in wealth creation, roughly half of the market’s total return.
The stock market created all of its wealth through the top 4% of winners, while the remaining 96% of stocks matched one-month Treasury bills or cash.
Our goal is to invest in the 4% of companies that have generated wealth for investors like Amazon and Alphabet/Google.
We believe the quality of our decisions will generate superior returns for our investors.
We do not worry about short-term market fluctuations; instead, we think about how we can create long-term value for our investors.
Our investment decisions are shaped by our five key tenets
1. We identify innovative and disruptive companies that have significant growth potential that can deliver exceptional compound returns over the long term.
YFS Intelligent Wealth Fund invests in the growth of technology that is changing the economy in a profound way. In particular COVID-19 has accelerated the need for adoption of technology and transformation.
We believe that the state of the economy is changing from physical to digital and that the internet is becoming the centre of all aspects of our private, social, and professional lives.
Therefore, the fund is positioned to take advantage of the changing world by investing in transformational technologies that will cause disruption.
Because we believe technological advancements will increase efficiency and disrupt industries and also generate significant returns for investors over the long term.
2. We focus on extraordinary businesses run by visionary founders with scalable business models.
Think like a business owner. Consider what the business will look like in ten years and what management must do today to make that possible.
It is important to ask the following questions: How efficient is the company’s scale, is there a high switching cost, and does it have intangible assets, such as a strong brand, does it have network effects, and does it have cost advantages?
As an example, we invest in companies that offer excellent benefits to their customers. To achieve it, economies of scale are crucial. It allows the company to drive down costs and pass those savings on to its customers.
Furthermore, we believe the best capital allocators are owners who have skin in the game, so our companies are run by visionary founders who remain actively involved in their businesses.
3. We target businesses that generate high free cash flow and high return on capital with great re-investment opportunities to deploy it.
A high return on invested capital is the key measurement we look for before investing. For example, how much capital does the business require to produce a pound of earnings?
And how much of those earnings are converted into free cash flow? If we are satisfied, then we look at the reinvestment opportunity for the business to grow its capital.
We look at financial information as a guide, not a deciding factor for the future because as an investor you are buying the future cash flow of the business, not the past.
4. We allocate more capital to superior businesses that can create long-term capital appreciation and have strong competitive advantages.
Superior businesses always consider the future five to ten years from now. They are the best capital allocators.
They are not involved in shortsighted behaviour that could jeopardise the company’s long-term prospects to achieve greatness. We believe such companies deserve to have a high allocation in a portfolio. Such extraordinary businesses deserve much more allocation in a portfolio.
5. We focus on highly ethical and environmentally friendly companies that are creating superior value for our society.
Investment shouldn’t be just about maximising returns but also about how companies generate them.
We are committed to investing in highly ethical, social and environmental companies that have a material positive impact on our society and environment.
However, our sustainability objectives don’t mean we sacrifice returns but that such an approach empowers companies to achieve their sustainability goals.
In conclusion, after we have completed the work, we need to remind ourselves that the future hasn’t even happened yet.
We have to do the best we can, given what we know, and what we do not know, to predict what the future will look like.
Howard Marks once said investment success doesn’t come from “buying good things,” but rather from “buying things well.”
You must think independently as an investor and this means that at times you must be willing to be different.
Superior investment results can only be achieved through unconventional behaviour. The long game requires patience and often looks wrong for a while; therefore, patience is not a virtue but a key characteristic of successful investors.
This blog is written by Awet Ghirmay. He is a Head of Investment Research at Minerva Money Management Limited.
The Fund is authorised in the United Kingdom and regulated by the Financial Conduct Authority (FCA) Firm Reference Number:754570.
Risk warnings
*The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
