When laypersons talk about a good stock, they generally have in mind a good company, with good management and good business. Unfortunately, the primary determinant of one’s investment return is driven by the purchase price and cash flow (via dividends received or subsequent sale) derived from the investment. In some cases, a good stock investment has the accompanying characteristic of a good company, etc, but in almost all cases, the initial purchase price drives much of the subsequent investment return. Sellers rarely let go of good companies at a good price.
Un-original investment criteria
As much as we’d like to promote ourselves as having a secret formula to investing, that doesn’t pay the bills. Investment performance is how we get paid. Accordingly, DCG is highly pragmatic in adopting what others (in particular, Benjamin Graham and Warren Buffett) have shown to work. Our investment criteria generally falls into the following flavours of stock investing:
- Low price to asset;
- Low price to earnings or cashflow;
- Focus on unwanted stocks (small market capitalisation/forgotten/ignored/turn-around/’disgusting’ companies; and
- Short-term disappointment.
Low Price to Asset
This is not low PB (price to book) – book value is a quick, and dirty.
What is a value investor?
Value investing is a highly over-used term that captures a huge spectrum of investment behavior. DCG is a value investor only in the sense that the price we pay must be significantly below the value we see. We diverge from some more dogmatic value investors who believe that a low price to book, or the final puff of a wet cigar butt-type, investing is the only way.
What else works?
Much of what we’ve adopted owes a lot to the insight shared by Benjamin Graham in Security Analysis and the Intelligent Investor. Aside from these two wonderful books, the interested reader may consider Tweedy Browne’s outstanding 60-page study on ‘What has worked in investing’ for further insights on the other tools that DCG uses.