Saturday, October 30, 2004
Brandes' familiar philosophy
One of my email subscriptions is to The Motley Fool's lunchtime newsletter. The Motley Fool publishes personal finance articles online, with a particular line in promoting low-cost index tracker investment amongst private investors.
That's not to say The Motley Fool refuses to recognise some fund managers have a record of significant outperformance. In this recent article TMF staff writer Maynard Paton doffs his cap to Brandes Investment Partners, who he goes on to describe as one of the fastest-growing fund managers in the world. After its formation in 1974, total assets had reached $11m by 1984. However, by 1994, those assets had swelled to $3.9b and by 2004, they topped $85b..
It's important to note this stellar increase from $11m to $85b in 2004 won't have been achieved through investment returns alone but will incorporate additional money from new investors or institutions.
Paton's introduces this fantastic article on Brandes' website. Reading this gave me so many strong and vivid flashbacks I now understand how it must feel to be Ozzy Osbourne or Sly Stone. Read on for extracts of Brandes' philosophy, in many areas frighteningly similar to my own:
We carefully evaluate the price we pay for the business. We analyze long-term rates of return, cash flows, balance sheet strength, management, asset values, and liquidation values. We also often look at private market transactions to determine intrinsic, or fair, value. We look for a business with a potential margin of safety – one selling at a price below our estimate of its intrinsic value. A margin of safety provides some protection from error and uncertainties. This is a conservative approach that aids in preserving capital and gives us the opportunity for profit...Most of our stocks carry low price-to-earnings ratios (P/Es). This is fundamental to our approach. But, as in the case of asset values, earnings may need adjustment – and we focus on “normalized” earnings, not the most recently reported results. In general, we tend to pay as little as possible for the earnings stream of a business. Stocks that are capitalized at very high rates (high P/Es) generally have high expectations attached to them. If these expectations aren’t met, the stocks may be vulnerable to steep declines. Stocks with low P/Es generally have lower risk and a greater margin of safety....
IS IT REALLY POSSIBLE TO ACQUIRE COMPANIES AT BARGAIN PRICES?
Yes. Many companies are overlooked, misunderstood victims of investors’ overreactions, misplaced fear, and exaggerated focus on short-term performance. We are often able to acquire companies inexpensively when they experience temporary difficulties or when market conditions are generally weak. We think independently and make investment decisions based on quantifiable evidence. We seek to shield ourselves from the influence of short-term public sentiment, and our actions tend to counter current opinion. We are patient, conservative investors who are willing to wait for values to surface...
WHAT IS THE ROLE OF ECONOMIC AND INDUSTRY ANALYSIS IN YOUR INVESTMENT PROCESS?
Analyzing or attempting to predict future macroeconomic trends plays virtually no part in our investment process...
HOW DOES A STOCK GET ON YOUR BUY LIST?
.. Securities approved for purchase are placed on a buy list with a specific price range for purchase and a target price for eventual sale...
HOW LONG DO YOU HOLD POSITIONS AND WHAT IS YOUR SELL DISCIPLINE?
We have no fixed holding period. We may hold an investment as long as the intrinsic value exceeds the stock’s market price. When a company’s stock price reaches our estimation of its intrinsic value, or if we are able to identify a superior alternative, it is sold.
Sound familiar? Several tenets of my approach are covered in this piece: margin of safety, low price-to-earnings ratio, investment based on quantifiable evidence, confidence to see beyond short-term sentiment, patience, clear exit points exercised with discipline and the conviction that economic analysis has no real part to play in equity investment.
Though I like to think I can remain aloof to popular investment mania and plough my own furrow away from the large investment houses, this Brandes article does provide some encouragement that my modus operandi is a mature and logical approach to investing. I'll be managing $85b myself in no time.
The Artful Dodger
That's not to say The Motley Fool refuses to recognise some fund managers have a record of significant outperformance. In this recent article TMF staff writer Maynard Paton doffs his cap to Brandes Investment Partners, who he goes on to describe as one of the fastest-growing fund managers in the world. After its formation in 1974, total assets had reached $11m by 1984. However, by 1994, those assets had swelled to $3.9b and by 2004, they topped $85b..
It's important to note this stellar increase from $11m to $85b in 2004 won't have been achieved through investment returns alone but will incorporate additional money from new investors or institutions.
Paton's introduces this fantastic article on Brandes' website. Reading this gave me so many strong and vivid flashbacks I now understand how it must feel to be Ozzy Osbourne or Sly Stone. Read on for extracts of Brandes' philosophy, in many areas frighteningly similar to my own:
We carefully evaluate the price we pay for the business. We analyze long-term rates of return, cash flows, balance sheet strength, management, asset values, and liquidation values. We also often look at private market transactions to determine intrinsic, or fair, value. We look for a business with a potential margin of safety – one selling at a price below our estimate of its intrinsic value. A margin of safety provides some protection from error and uncertainties. This is a conservative approach that aids in preserving capital and gives us the opportunity for profit...Most of our stocks carry low price-to-earnings ratios (P/Es). This is fundamental to our approach. But, as in the case of asset values, earnings may need adjustment – and we focus on “normalized” earnings, not the most recently reported results. In general, we tend to pay as little as possible for the earnings stream of a business. Stocks that are capitalized at very high rates (high P/Es) generally have high expectations attached to them. If these expectations aren’t met, the stocks may be vulnerable to steep declines. Stocks with low P/Es generally have lower risk and a greater margin of safety....
IS IT REALLY POSSIBLE TO ACQUIRE COMPANIES AT BARGAIN PRICES?
Yes. Many companies are overlooked, misunderstood victims of investors’ overreactions, misplaced fear, and exaggerated focus on short-term performance. We are often able to acquire companies inexpensively when they experience temporary difficulties or when market conditions are generally weak. We think independently and make investment decisions based on quantifiable evidence. We seek to shield ourselves from the influence of short-term public sentiment, and our actions tend to counter current opinion. We are patient, conservative investors who are willing to wait for values to surface...
WHAT IS THE ROLE OF ECONOMIC AND INDUSTRY ANALYSIS IN YOUR INVESTMENT PROCESS?
Analyzing or attempting to predict future macroeconomic trends plays virtually no part in our investment process...
HOW DOES A STOCK GET ON YOUR BUY LIST?
.. Securities approved for purchase are placed on a buy list with a specific price range for purchase and a target price for eventual sale...
HOW LONG DO YOU HOLD POSITIONS AND WHAT IS YOUR SELL DISCIPLINE?
We have no fixed holding period. We may hold an investment as long as the intrinsic value exceeds the stock’s market price. When a company’s stock price reaches our estimation of its intrinsic value, or if we are able to identify a superior alternative, it is sold.
Sound familiar? Several tenets of my approach are covered in this piece: margin of safety, low price-to-earnings ratio, investment based on quantifiable evidence, confidence to see beyond short-term sentiment, patience, clear exit points exercised with discipline and the conviction that economic analysis has no real part to play in equity investment.
Though I like to think I can remain aloof to popular investment mania and plough my own furrow away from the large investment houses, this Brandes article does provide some encouragement that my modus operandi is a mature and logical approach to investing. I'll be managing $85b myself in no time.
The Artful Dodger
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