My investment strategy

My strategy comprises of different ideas from some of the world’s best know investors: Buffett, Fisher, Graham, Lynch, Bolton and more. I agree with different principles from each of these investors, but have my own ideas as well. So you can’t say I have one defined strategy that I adhere to. One thing that is 100% sure is that I am a long term investor, I don’t believe in day trading or short term trading. All my investments are made with the view to holding them long term, unless something materially changes.
When I first got into investing I got a book called How Buffett does it. It’s a fairly simple book and probably not complex or in depth enough for a serious investor, but it does give you some of the principles that Buffett stick to in his investment principles.
For example the idea of a business moat, in other words something that gives a company a competitive advantage. I believe examples in my portfolio are Speedy Hire (SDY) and Stobart Group (STOB) both companies that have built up businesses that are hard to replicate. Speedy Hire is the largest provider of hire equipment to the construction and infrastructure market. They have a nationwide presence and long term contract with a large number of the biggest construction companies. It is therefore very difficult to break into this market. Stobart is mainly known for its Eddie Stobart road haulage business, but also provides warehousing, rail freight services and operates an inland port and 2 airports. The Stobart group was voted the 32nd best business brand in the UK in 2010 ahead of companies like DHL, UPS and HSBC. They also have numerous contracts with major customers such as Unilever, Tesco and Nestle.

“Be fearful when others are greedy and be greedy when others are fearful” is a quote by Warren Buffett. This is a quote that I believe is very important and sums up the Mr Market analogy that Benjamin Graham uses in his book The Intelligent Investor. Basically this quote is explaining the human trait, which is that we follow the trend. When there is optimism a lot of shares tend to reach unrealistic levels as people believe the good times can never end. A good example of this is the internet bubble of the late 1990’s where investors were putting spectacular valuations on companies that never looked like making a profit. The other example is the recent credit crunch where everyone was rushing to sell and good companies could be bought at knockdown prices. I would say that my best purchases during this crisis were mining companies. I bought Central African Mining and Exploration Company (CAMEC) at 3.7p and it was taken over by ENRC for 20p less than a year later. I also bought Kazakhmys(KAZ) at £2.70 when the market was valuing it at around the same price as its stake in ENRC (itself undervalued at the time).
Ensure a margin of safety is also a key Graham and Buffett philosophy and one that is worth remembering. Last year I invested in Emblaze (BLZ) a technology company that was set to launch a smart phone that had the potential to significantly contribute to turnover and profits if the launch was successful. There was always a fair amount of risk involved in this as it depends on mobile operating companies agreeing contracts to buy the phone. As it turned out they couldn’t find anyone interested enough and they have recently announced that they will not manufacture the phone, but will try and license the technology. If I hadn’t ensured a margin of safety I would undoubtedly have lost a serious amount of money, as it stands I am down around 25%. However my margin of safety is the fact that the company has a 51% stake in a profitable Nasdaq listed company Formula systems (FORTY), which is valued at roughly £58million compared to a current market cap of Emblaze of £43.6 million. The company also has other assets and potential revenue streams not least a pending lawsuit against Apple for patent infringement that could yet result in a payout.

I have also invested in some high yielding shares as I believe these offer good value when reinvesting the dividends. Compounding is very important and its importance should not be underestimated. I have invested in high yielding companies such as Interserve (IRV), Fiberweb (FWEB) and Vodafone (VOD). These companies combined are yielding in excess of 7% of my combined outlay. This is a very attractive return and provides me a revenue stream which can be reinvested. Of course it is important to determine if the dividends are likely to be kept when choosing this strategy.

I also believe that emerging markets are the place to be and I have invested in 2 companies that give me specific exposure to these. One of these is Eros (EROS) which is a distributor of bollywood films. The Indian market is expected to grow significantly and I especially like the entertainment industry as a large part of the population is under 25 years old. A large part of the population have televisions for the first time, which means that there is still a lot of value in the Eros catalogue of 1,900 films a lot of them classic films which the majority of the audience might not have seen yet. I believed that Eros was also undervalued based on its fundamentals. My second play on the emerging markets is Lonrho (LONR) which is a mini African conglomerate. They own or have stakes in companies in 17 different African companies and these include a deepwater port servicing the West African oil industry, agriculture ventures, an airline, Hotels, It companies and more. It has taken the company a while to build up the various divisions, however they are now at the stage where they are cash positive and for the large part they should be self funding. Lonrho was an investment where I didn’t believe it was undervalued at the time, however I believed, and still do in the long term growth potential, both of the company and of the African continent as a whole.

As you can see I am not adhering to one specific strategy, other than being a long term holder however I am using different strategy’s and philosophies ranging from Value investing to growth investing. I however try and stick to one guiding principle and that is to ensure I have a margin of safety. Another thing that I have learnt from reading various investment books is that you need patience. When you have done your research and ensured a margin of safety do not be dismayed if the market doesn’t initially share your views. You shouldn’t keep looking at the stock prices, but at the business you have invested in. If the business is doing well eventually the stock will do well. It is hard to find the bottom for a particular share and you shouldn’t necessarily try if you have done the research and believe there is value in the share, with a margin of safety, then you should buy it. It might go down a bit, it might even go down a lot, but you should not panic if nothing material has changed then eventually the value will out.