Saturday, May 9, 2009

Investment philosophies

Since value investing came to my knowledge over a year ago, i have had the opportunity to read numerous books and publications about the subject from various authors. From Ben Graham to Warren Buffett and closer to Jim Chuoung and Stephen Jarislowsky, I have gained a lot of information and concepts from each of those men. One of the most crucial points I came to understand is that each investor, and mostly in the case of value investors, needs to have some of investment philosophy based on firmly held principles.

Such a philosophy takes time to acquire and being in the process of developing mine for about a year allowed me to understand to a deeper extent what each of the investment gurus are talking about. I have learned a lot by looking at the investment principles of some of them and I will expose those of Philip Fisher and Stephen Jarislowsky.

Starting with Fisher, I understood his principles after reading his most famous book entitled Common Stocks and Uncommon Profits that was first published in 1958 I recently talked about him in this article, but it is important to explain his investment principles in further detail.

He suggested to buy companies that have disciplined plans for achieving dramatic long-range profit growth and have inherent qualities making it difficult for newcomers to share in that growth. What we see today as barriers to entry.

He also said to buy those companies when they are out of favour. I guess it is from Fisher that Buffett got his quote: “Be fearful when others are greedy and be greedy when others are fearful”. He also suggested to hold a stock until either: there has been a fundamental change in its nature (e.g., big management changes), it has grown to a point where it no longer will be growing faster than the economy as a whole or, it is trading at a high P/E ratio because of mass market speculation only.

Philip Fisher also advised keeping the size of a portfolio at 20 companies or less and to never accept blindly whatever may be the dominant current opinion in the financial community; however warning that nor should investors reject the prevailing view just for the sake of being contrary. He finally insisted on the fact that serious investors had to understand that success greatly depends on a combination of hard work, intelligence, and honesty.

Stephen Jarislowsky, put himself on the public scene more recently when he published in 2005 his book called The Investment Zoo: Taming the Bulls and the Bears. The astonishing fact is that his writings are rarely about the precise subject of investing but tend to talk about the wider economy and his disagreement with the ways of the North American financial services industry. But I manages to find some interesting notes about what he looks for when investing in a company.

Stephen Jarislowsky talks about wait at least 6 months after the official announcements of a recession to make purchases on the open market and justifies that during that period, mutual funds, which are big players in the stock market, are dumping their shares to satisfy the redemption requests of their clients. He also notes that, at the same time, panicked investors pull their money out of the market and sit on the sidelines waiting for signs of an early bull run.

He does not invest in what he considers to be failing industries. Jarislowsky means by that industries that have not created value for their investors overall: citing commercial flight and car manufacturing. The events of the last decade sure show him right.

But as for many value investors, the most important think he looks for in a company is able and honest management, no matter the operating performance of the company. Stephen wants to know that the managers of companies he invests in are shareholder oriented above all.

The investment principles are very insightful and I hope they will put you on a road to learn more about value investing and the outstanding results showcased by those who follow it.

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