Why, more and more, I’m “Investing for Keeps”
They say having children profoundly changes you. It certainly does. Last week my oldest daughter turned five. Ten days prior, her younger sister turned one.
Since my daughters were born, I have become more patient and more forgiving. I have also begun to think much longer term. This applies especially to my investments.
Over my career, I have used several different investment systems that I successfully honed to the point that each throws off positive results on average, over the medium and long term, with considerably less risk than the market as a whole.
That’s the key to me: controlling risk.
There is nothing wrong with just investing in high-quality, large-capitalization, blue-chip stocks in your home market, as most people do, but you are basically taking on 100% of the market risk if you do that. Though you could argue that since you probably know your home market best, you are taking on less risk, you limit yourself to a much smaller opportunity set if you have a home-country bias.
I have never found that an attractive proposition. I look globally, and I have mostly used various market-neutral or even counter-cyclical strategies, to reduce my exposure to the market’s crazy swings. Here are several of them:
- Takeover arbitrage, where I buy shares in a target company that has received a binding buy-out offer from an acquirer, which is still subject to certain conditions but is most likely going to succeed at the offer price. I handicap the odds and buy into the target at a small discount to the offer price, and hope to pocket the “spread.” Eight or nine times out of ten it works.
- Deep value investing where I buy something cheap and hope to sell it less cheap. Often these are low-quality investments that got sold off more than they deserved, as others abandoned them. They are not superior businesses bought to be held, and there are many so-called “value traps.” You need to turn over a lot of rocks to find suitable ones to buy. It’s a constant effort.
- Speculating in small mining shares, where the risks of a 50% to 100% loss are high, but because there is also the chance of 500% or even 1,000% gains, if you do it well, you can end up making excellent returns over time, on average.
- Income investments that are out of favour, or not well understood, which yield 8%+
Aside from income investments, all these strategies are time and labour intensive. They are effectively trading strategies. Once you make the return you expected on the investment (or it proves your thesis wrong and you lose), you must sell it and move onto the next one.
The compounding returns come only from you constantly working to achieve them, not from the returns inherent in the investments themselves. That gets to be hard work. It also means lots of slippage due to the frictional costs of trading in and out. There’s brokerage to pay, bid/offer spreads, and taxation.
So, the strategy that I have always wanted to employ most, but rarely could, due to valuations always being too high for my liking, is to simply buy wonderful companies at fair prices and then hold them, monitor them carefully of course, but to let the businesses themselves do the compounding. I even named my investment company “Wonfair” for that reason.
With my daughters so young, I am now thinking longer term. Given that longer-term perspective, even if I invest at higher valuations, translating into more modest projected rates of annual return, due to the power of compounding over long time periods, I figure I can still multiply my capital at a decent clip.
And so, more and more, I am finding myself seeking to “invest for keeps,” that is…
Buying fewer, higher quality businesses
with durable competitive advantages and just hold them – ideally for decades
These ideas are, of course, nothing new. Indeed, they encapsulate what Buffett acolytes have been saying and trying to do for decades.
But on today’s stock markets, even in the midst of a pandemic, unfortunately valuations are still such that nearly all the wonderful businesses I’d like to own are trading at ridiculously high prices.
That’s where my second recent awakening comes in.
In mid-2018, I returned to the place of my birth: Dar es Salaam, Tanzania. There, I could suddenly see very clearly that there are still places in the world where simple, easy to understand businesses with durable competitive advantages, and decades of strong growth ahead of them, trade at bargain valuations.
I realized there was actually no need for me to try and find Buffett-style businesses in the crowded, overvalued and hyper-competitive stock markets of the developed world.
Thankfully, there are still many stock markets globally that are totally off Wall Street, Bay Street, and The City of London’s radars. They’re in economies where interest rates are still normal… where simple consumer staple businesses are still growth industries in their early stages, and where demographics provide a strong tailwind.
These markets are harder to research and get exposure to. It requires in-depth on the ground research. It means building new networks, opening brokerage accounts in some weird and wonderful corners of the planet that most Westerners never entertain the prospect of visiting. Above all it means being very patient and forgiving of the flaws that exist.
But when I can buy shares in the dominant cement business in Dar es Salaam – a city of some 4 million today, which by the time my daughters are my age, is projected to be among the top dozen cities in the world by population – on better than a 14.5% dividend yield, a price earnings ratio of less than 6 times, and generating a percentage return on invested capital in the mid-20 percent range, all of that effort becomes well worth it.
I’m not the only one. My business partner and colleague, Peter CL Tan, sees the same thing. He’s looking to invest in 10 to 15 solid, double-digit dividend paying companies around the world for his retirement. He has now gone live with his website, a sister site to mine: https://double-digit-dividends.com/
As it happens, Twiga Cement fits his investment criteria too. He’s recently published a FREE Special Report on Twiga. You may want to check it out.
Rummaging through the bargain bin of high-quality, Buffett-style businesses in stock markets around the world where few mainstream investors bother to even look has become my new obsession. I can hopefully help others overcome their fear of the unknown and venture further afield, too. That’s why I started https://globalvaluehunter.com/ and it’s why I’m starting the African Lions Fund.
Again, I want to “Invest for Keeps,” for the long-term, planning now for how the world might look when my daughters are adults and starting out in their working lives.
As always, thank you for sharing this journey with me.