What we said in our fund newsletters over the years …
2020 – Present
Even when there is no crisis raging and no house on fire out there, our thinking and focus is on continuous learning and continuous improvement. When a crisis brews, when something blows up in the real world that causes panic in the financial markets, we not only continue calmly in the way that we have done but we further refine and re-examine our way of investing to make sure that all our assumptions and foundation principles not only remain intact but also that our methodology is improved upon. In this way, we endeavour to emerge stronger.
Having experienced many crises in the last 24 years (I counted 5 major crises) we believe that we are emotionally and intellectually better and stronger than before.
Yet the fund rose 38% in 4 years 4 months without higher portfolio valuation ratios, despite the Japanese economy heavily impacted by covid, since the start of the fund. How was this achieved? The answer is a combination of:
1. A disciplined approach to picking stocks with care taken to find unusually attractive valuations across multiple valuation metrics to reduce the risk of permanent loss and provide various opportunities for profit.
2. Focus on businesses with a stable profitability and dividend track record over two decades. Most businesses have their own small business niche, which has allowed stable profitability and opportunities for growth, even in the perceived slow growth Japanese economy. This has given resilience to businesses, during the recent difficult Covid business environment.
3. Discipline in selling stocks and reinvesting in more attractive opportunities.
4. An unsentimental objective approach and focus on opportunity cost is taken, to reinvest in the most attractive opportunities, funded by selling the least attractive investment, even if it is undervalued.
At time of writing no one can say how long it will take for governments and public health authorities to defeat the Coronavirus pandemic: 1, 2 or more quarters, a year or longer, … Who knows? With the comfort of time on our side and applying the investment process described above (and as set out in our Fund documentation), I don’t think that we need to get too disconsolate, no matter how long.
We never pay a high price for each stock that we own. We always buy at a discount to assessed fair value, usually on balance sheet or historical basis. No forward-looking pricing assuming that a bright future lies ahead as these often do not materialize, in our own opinion.
From the history of the companies we own, management must show themselves to be competent and able to manage the underlying businesses. If management is on the side of shareholders, it would be no different from a competent captain and a disciplined and experienced crew sailing a ship upon which a fierce unforeseen storm descends. The passengers may then be more certain of making it back to port safely in such a case.
Our investment case(s) stock-by-stock do not assume a rosy future prospect.
You will note that we have more ups than downs in the past, furthermore the size of the ups is bigger than the size of the downs. If we were to take the analogy of a board game of snakes and ladders, it means that investing the way that we have done, we encounter more ladders than snakes, longer ladders than snakes, the nett effect being that we generate positive investment gains for shareholders over the longer term.