Investment Philosophy
The Investment Philosophy of Aberdour Investments
If you are considering working with a financial advisor, you are probably curious about their investment philosophy. Does it align with your own? How might your investments change if you were to hire an advisor? Is their investment philosophy simple and easy-to-understand or filled with technical jargon and language that you don’t understand?
We may not be able to answer every question you have in this article, but by giving you an overview of our investment philosophy in easy-to-read language, we hope you get an understanding of what we believe in and the core ideas that shape our investment portfolios.
1. Big ideas
It is almost a necessity for investors to have some level of optimism about the future. While we are under no illusions that the world is a perfect place, we believe there are many individuals and companies working on tomorrow’s problems today. Companies with the potential for exponential growth often have common traits, such as a laser-focused mission, advantages over their competitors, and an enormous number of potential customers. Businesses like this are scarce but can generate outsize returns for investors that recognize their potential and their vision for the future.
It’s easy to look back and see how the biggest companies today revolutionized our world. Amazon realized ecommerce was the future of consumer shopping before traditional brick and mortar stores and reaped the rewards. Netflix, once a niche service to receive DVDs by mail, pivoted to streaming video so early that many customers didn’t have internet fast enough to watch movies and TV shows. Identifying these companies is obviously challenging. If it weren’t, we all would have invested in Amazon, Apple, and Google decades ago. However, we believe it is possible, but not easy, to identify companies that will play a role in shaping our future and have the potential to reward shareholders for investing in their company.
2. Disciplined buyers
Warren Buffett, one of the greatest investors ever, famously said investors should “be fearful when others are greedy and to be greedy only when others are fearful.” That sounds great in theory, but in practice is extremely difficult to implement. Some of the most rewarding times to invest are when the stock market is not doing so great. The same can be applied to individual companies: the best time to invest may not feel like the best time to invest.
You can identify a company that is a great investment, but if you buy the stock at a very poor time, your investment may not perform well. Identifying great companies to invest in should always be accompanied by identifying whether or not it is a good time to invest. Purchasing stocks, or stock market indexes, below their intrinsic value (the “real” value of a company today, based on expected future performance) is one of the best ways to increase potential returns. However, it requires a great deal of discipline to buy at these points. Over the last 20 years, two of the best times to invest in the S&P 500 index would have been in the middle of the housing crisis and Great Recession of 2009 and during the pandemic crash in 2020. Two very difficult times to be optimistic about the stock market, but very rewarding times to be an investor.
3. Patience
An investor can be very smart with many great ideas, but look foolish if their timing is slightly off. Someone who says the stock market is going to crash is almost certainly correct, depending on your definition of crash, but when they believe the market will crash will determine if they look like a genius or lose all their credibility.
We believe investing requires patience. Investing in companies with a great potential for growth does not mean you will be immediately rewarded. The path to greater than average returns often comes with greater than average volatility.
We don’t invest in a company because it might do well today or this month, but instead consider its outlook over the coming years and decades. Short-term fluctuations in the stock market or a company are very difficult to predict. Staying the course isn’t easy to do, and the road is bumpy and filled with many twists and turns, but history has shown us that often that patience is handsomely rewarded.
4. Knowing what you own
We believe in only investing in what we know. If you don’t know how a company is successful or why their business model is better than other companies in the same industry, how can you comfortably invest in them? If we are unable to ascertain a deep level of understanding of the business model and industry of a company, we don’t believe we should invest in it.
5. Value assessment
When evaluating companies, we want to know what the company is actually worth, not what the market says it is worth. To do this we use what’s called fundamental analysis, a method of determining the value of a company based on macroeconomic factors, relevant to many companies, and microeconomic factors, relevant to only the company being analyzed.
An example of a macroeconomic factor could be an overall decline in the value of the real estate market in the US. This change will be relevant to many different companies, especially those in real estate. A microeconomic factor that could impact a company may be earnings coming in higher than expected one quarter. This is only relevant to the company in question and may be a negative, neutral, or positive signal for other companies in the same industry.
Analyzing all macroeconomic and microeconomic factors that impact a company’s operations can give you an idea of the intrinsic value and stock price of the company. If the intrinsic value is higher than the market value, the company is undervalued; if the intrinsic value is lower, the company is overvalued. Assuming the fundamental analysis is correct, investing in companies that are undervalued is expected to generate higher returns compared to investing in overvalued companies.
6. Portfolio construction
Volatility in the price of a stock is not necessarily a signal that the stock should be avoided. If we believe the volatility will not have a long-term impact on the company, it can be a great opportunity to purchase stocks at a temporary “discount.” There is always some level of volatility in the stock market, and we believe in taking advantage of that volatility whenever possible when constructing a portfolio.
Investing for the future isn’t easy. Not only is it difficult to save and invest a portion of your income for the future instead of spending it all now, it is difficult to know exactly what you should be investing in. We believe investing can be made easier by following three main principles. Recognizing companies that have the potential to shape our future and a vision for how they are going to accomplish it can be a sign of a worthy investment. Having the discipline to make difficult decisions and purchase stocks below their intrinsic value can increase your potential future returns. Maintaining the patience required to realize investing returns does not take days or weeks, but years and decades.
Any investment portfolio is not one-size-fits-all, but is based on your specific financial goals, timeframe, tolerance and capacity for risk, and so much more. If you want to learn more about how our investment philosophy aligns with your financial needs, reach out and schedule a call.