Buy the right company at the right price and leave it be

When it comes to investing, it’s better to be more sloth than leopard. If you do your own analysis it needs to be accurate and if you have made reasonable assumptions of where you think this company will be in the future, you must then wait for the future to come. The progression of strategy and markets takes time; it won’t be linear either.

BUY THE RIGHT COMPANY

It’s as easy as it sounds but it does take thought and work. Don’t trade cyclical stocks – you won’t be able to pick the tops and bottoms and for all your hard work you will be rewarded with a capital gains tax hit on every sale. Look at the drivers of price and volume. Are they sustainable? Simply put, will these revenues be sustained into the future? This is perhaps the most important part. It means thinking about the longevity of the business model and how this company fits into its industry ecosystem. Does it have good fundamentals? Fast growing revenues are a sign that the product or service is demanded in the market, but just check the advertising spend. Some companies raise money from capital markets to plough into advertising to drive revenues. This is a brute force revenue driver. It doesn’t work. The product or service should be so good that it is demanded by the market and is largely spreading itself. Is the company producing cash flow from operations? Can it comfortably handle any debt it has? Does it have good reserves of cash?

PAY THE RIGHT PRICE

Your analysis of the future prospects of a company might be compelling, but if you pay too much your investment will go nowhere. If a stock is overvalued, the market has already priced in those compelling future prospects and there is no gain to be made in making an investment. If the price is fair and your analysis correct, then your investment today will participate in the future growth shown in your analysis. If the price is discounted you will receive a double boost to your investment. First, when the market recognises the mispricing and revalues the company to its assessment of fair, and second, as you enjoy the realised future your analysis predicted.

IMPLICATION – LEAVE IT BE

At Blue Oceans Capital, unless events occur materially different from our analysis, we leave our investments alone. Don’t be influenced into selling by a sudden market downturn or tempted into selling a portion of your holding because it has now shot up and seems temporarily overvalued. Ride out the highs and lows and let the course of business take its place. The progression of strategy and market has nothing to do with revolutions of the sun or the end of the financial year. It won’t be a linear journey either.

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