Podcast Transcript:

Hey there, welcome to the first episode of the Investor Education Mini Series. Today I am going to give you a brief overview of my investment process.

• First I look to investment in quality businesses which I understand and that have long term prospects. A quality business is one that has:
  • A strong balance sheet with little or no debt and preferably a net cash position
  • Long term future growth prospects; meaning will the business still be here in 10, 20 or 30 years time. Warren Buffett sums this up well he says something along the lines of, “I don’t think the Internet is going to change how people chew gum.” This basically implies that his investment in Wrigley’s Gum was not going to be impacted by changing trends and technology as people will continue to chew gum regardless of what happens. This simple way of thinking can be applied to all our investments to help us understand if the business will still be here long into the future
  • Finally, a business which has high returns on equity and invested capital. Here we are looking for double digit returns on the capital which investors have invested into the business, if the business can’t generate solid returns, it is not likely to provide you with solid returns on your investment
• My idea is to find the best businesses on the market and analyse them to give me a better understanding of how they operate. I will continue to monitor and follow these businesses, waiting for the right opportunity to buy. You will find that great companies rarely trade at or below their intrinsic values, but on certain occasions, such as the Global Financial Crisis or more recently with the COVID-19 Pandemic, these wonderful businesses will present you with an opportunity to buy them at discounted prices. Through in depth analysis and a solid understanding of the business, you will create the conviction that is required to buy big and continue to hold these investments through volatile markets.

To help me find these wonderful businesses I will apply the following steps:

1. Reduce the number of investable businesses through a stock filter, looking for low debt and high returns on equity and invested capital. I will also apply an ethical filter. I have found the best screener availbe is through GuruFocus, I have provided a link in the show notes. Basic Screen
2. I will then create a Watchlist from the stock filter of businesses which I understand and have met my criteria
3. I begin the investment process by selecting a business from my watch list and then read through the companies ASX announcement history and obtain Annual Reports and any other relevant data from investor presentations etc.
4. I then record all relevant data into my spreadsheet, this will help me when it comes to working through my checklist and also provides me with a better understanding of the company’s financials and make any necessary adjustments. I again use GuruFocus to download companies financial reports. They offer up to 30 years worth of data on individual businesses, providing you with the Income Statement, Balance Sheet and Cash Flow Statement, as well as a whole heap of other calculated metrics and ratios.
5. Work through my checklist to establish a quality rating of the business
6. Last stage is to calculate the intrinsic value of the business, in this step I will use a predetermined cash flow figure, an estimated growth rate for the company and will apply an appropriate discount rate and margin of safety to account for the perceived risk of the business
7. When it comes to selling, I will only sell when there is a fundamental change within the business which is likely to result in long term difficulties for the business to continue to operate and produce good returns

In summary, I look for quality business which I understand. I then compile these into a watchlist to enable me to closely monitor and perform in depth analysis. This will help build the conviction needed to buy big and hold, provided your analysis and the fundamentals of the business have not changed.

I compile a watchlist of investable business initially by using a stock filter which removes the majority of business that don’t fit my criteria. I then run each business through my spreadsheet and checklist to help me determine if it is a business I would want to invest my money in. Lastly, when the business becomes fairly valued, according to my intrinsic value calculation plus an added margin of safety, I will buy and continue to hold until my investment thesis is broken. I could get a t-shirt made up which reads; analyse, sleep, buy, repeat.