“Investment is most intelligent when it is most businesslike.” - Warren Buffett
Quest for the proverbial golden goose
My investment philosophy is rooted in the principles of value investing and my strategy is simple: Find high quality and growing businesses. Then load them up at reasonable prices.
A high quality and growing business, by definition, has near insurmountable moats that allows it to grow its market share and the ability to generate copious cash flows over the long-term. The proverbial golden goose of a business that has such qualities will invariably lay eggs of great returns, whether through dividends, capital appreciation or a combination of both.
Once I find such a goose – a gift that truly keeps giving – I am loathe to splice it open (by selling) unless there are compelling reasons to do so. These reasons are usually due to a structural deterioration of the business or stratospheric valuation.
While there are many ways to skin the investment cat, few methods generate persistent above-average returns. To achieve superior results in a world of average investment returns, it is imperative to do things differently. Over the years, I realised that the most intelligent strategy to achieve it is by investing in high quality, growing companies which consistently compound capital.
One of the best things about the strategy of building a portfolio of golden investment geese is that I seldom suffer from sleepless nights worrying about the many things that can go wrong with my investments.
The sure thing - Portfolio volatility
I am almost certain the value of my portfolio will decline 50% or possibly more at some point in time.
For historical context, during the dot-com bubble, the S&P 500 peaked at about 1,527 points in March 2000 and bottomed out at 801 points in September 2002. That equated to a loss of nearly 48%. During the global financial crisis, the S&P 500 peaked at about 1,562 points in October 2007 and bottomed out at nearly 683 points in March 2009 for a total loss of about 56%.
Between then and 2020, the S&P 500 has experienced numerous corrections of 10% or more, with the most recent bear market triggered by the COVID-19 pandemic.
Markets do what they do – they fluctuate and so will my portfolio. Things will turn ugly, blood will be on the streets and mine will surely be spilled too. When blood is everywhere, that is usually the clarion call to back up the truck at the market, and load up on the golden investment geese.
For better or worse, volatility is part of the game of investing. It is a ‘fee’ we have to pay for the upside of our portfolio. Morgan Housel, a former financial journalist and an investor puts it best when he wrote:
“Returns are never free. They demand you pay a price, like any other product. And since market returns can be not just great but sensational over time, the fee is high.
“Declines, crashes, panics, manias, recessions, depressions. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. You can take them to the local county fair where tickets might be $10. You might still have a good time. But you’ll usually get what you pay for.
“Same with markets. The volatility/uncertainty fee is the cost of admission to get returns greater than low-fee parks like cash.
“The trick is convincing yourself that the fee is worth it. That, I think, is the only way to deal with volatility; not just putting up with it, but realizing that it’s an admission fee worth paying. There’s no guarantee that it will be. Sometimes it rains at Disneyland. But if you view the admission fee as a fine, you’ll never enjoy the magic.”