My Damascene moment of investing

Having spent almost 15 years labouring in investment research for a variety of stockbrokers or investment banks, I realised that I had learned very little. About trading, certainly, but about investment, nothing.

So in the mid-1990s, armed with a decent sized portfolio, brought about by being overpaid in the City, I resolved to get more professional.

But how do you find a robust investment philosophy; that elusive anchor line? I instinctively knew that concentrating on stock market activity and betting on price action was not the way. Shares are not chips on a gambling table.

Also I accepted that real investment was about taking part ownership of a real business. So the system had to be driven first and foremost by the companies themselves; the stock market is there solely to reward astute investors.

And I do believe that long-term, there is a 100 per cent correlation between the operating performance of a company and its share price movement.

The task was to identify companies with the most predictable business models, analyse them financially and operationally and only then try to value them. After all, if a business isn’t predictable to a high degree of certainty, how can you value it? And if you can’t value it, how do you know if the stock market is presenting you with an investment opportunity or not?

Buying an excellent business at an excellent price invariably makes an excellent long-term investment. 

On the journey, I read more books on investment than I care to remember. Most weren’t worth the effort but occasionally I would pick up something valuable to add to the mix. Benjamin Graham, the Father of Securities Analysis, caught my eye in particular.

Even more so his disciples – the ‘Superinvestors of Graham-and-Doddsville’ as Warren Buffett dubbed them. Here was a group of guys who were battering the S&P 500 year-in, year-out with very different portfolios.

Indeed, the only common factor seemed to be that Ben was true north on their investment compasses. Foremost among them was Buffett. From reading him, I discovered Charlie Munger, his long-time investment partner. And then on from Munger to Philip Fisher. I was discovering Business Perspective Investing.

And so to 1997, and the publication of Buffettology by Mary Buffett and David Clark. Mary and David had been insiders in the Buffett household allowing them to observe the Master at first hand.

Their book was an accessible and simple exposition of Buffett’s methodology. It showed the importance of concentrating on the economics of a business and discarding companies that don’t stack up to certain predetermined criteria.

This was a step change in my thinking.

Away from cheap shares to outstanding companies.

Away from EPS growth rates to cash returns on invested capital.

Away from allowing random share price movements to determine my actions to having the underlying business tell me how to act through its operating results.

This were the foundation stones of leaving behind a career of being a securities (or investment) analyst to becoming a business analyst and subsequently fund manager. Over the years I have burnished the model from practice and experience.

The discipline keeps me away from the boom-and-bust of the latest stock market fad and has also ensured that I have never had a company go bust under me.

In a nutshell, buying an excellent business at an excellent price invariably makes an excellent long-term investment. That is the essence of Business Perspective Investing.

Keith Ashworth-Lord is founder and managing director of Sanford DeLand Asset Management