Investment Philosophy

I’m long-biased and value-oriented. My investment philosophy is largely formed by my Private Equity investing experience.

Here are some of the principles I try to adhere when making investment decisions. Some of the characteristics are also seen in good LBO candidates.

• By buying shares of a company, I become the partial-owner of that business. It’s my company. And I should approach all equity investments with this mindset.
• The company has sustainable competitive advantages. These moats comes from three sides: supply, demand and economies of scale.
• The company does not have to be a great business but there has to be a wide margin of safety, and that I can identify and be confident about catalysts that’d correct the price.
• Predictable and steady cash flow with low CapEx requirement.
• A manageable debt level. Some businesses are highly levered in nature, so I will have to see if the company is using debts effectively.
• The investment horizon depends on the gap between the price and the value of a company. If it takes 10 years to close that gap, I’d give it 10 years.
• High margins over long time. This is usually an indicator of moats and it gives the company headroom when the economy or the underlying industry goes south.
• High ROIC over long time. This is a good indicator on how well the management’s capital spending decisions are. A business generating high ROIC also suggests operational efficiencies and deep moats.
• The management is experienced and competent. I would also analyze the compensation structure to see how are executives incentivized and whether they are in line with shareholders’ interests.

Note that I would occasionally analyze investment opportunities in other parts of the capital structure. My investment philosophy allows me to look at some special situations investments as well if I’m comfortable with the margin of safety.