What is my investment philosophy?
If I were to describe my investment philosophy in quite a few words some time ago, it would be “value investing”. But it is important for me to explain further, because these two words are meaningful and meaningless at the same time due to their inflationary usage. Somehow everybody seems to invest in value and undervalued stocks (who invests honestly and openly in overvalued stocks?) …
In bull markets everyone pretends to be a value investor. What counts is to not be burnt in downswings. Here you can see why that is so important. The bigger your losses, the more disproportionately your investments have to rise to only break-even. That becomes ever more unlikely (or could take a decade or two) the higher you fall.
| Your potential loss | What is necessary to only break-even |
| –10% | +11.1% |
| –25% | +33.3% |
| –50% | +100% (!) |
| –90% | +900% (!!) |
You have always to invest with an attractive upside potential and at the same time limit your downside risks. Thus, you will achieve attractive returns over the whole cycle (not just up for some time and then throw in the towel).
Recently, we have seen what happened to the so called “long-term investors” who bought the tech-stocks near their tops. Not even that rarely, among the darlings were pretend-businesses of tomorrow with unclear future prospects (to say it mildly). Or the ETF investors that thought that they had spread risks widely enough. Valuations of most stocks where so out of this world that many of the companies were fully valued for the next decade (under the assumption that the companies would be alive and not bankrupt by then).
It’s all about understanding the investment case, having a good gut feeling (feeling comfortable with the investment) and proper risk management without losing common sense.
My aim is not to invest in looking-like “cheap stocks” with low single digital PE ratios, sky high and unsustainable dividend yields and a PB ratio below one. These times are over. Those rather full-grown stocks are typically called “value stocks” (which in effect often tend to be rather full-grown value traps).
I prefer to be invested in undervalued businesses (note: stocks are fragments of real businesses, not abstract papers) that are ideally growing and have not yet fully exploited their whole potential from a business and a valuation perspective. I will also cover stocks that are just under-covered and hence not “crowded”, yet. This could be special situations or just cyclicals that now have their time. There are always good and investable stocks for different environments, even falling markets!
A few words about diversification: The goal should not be to have as many different investments as possible (or buying ten ETFs). That is a false misconception and misleading of unexperienced, novice investors. The one thing you do by holding say 50 different stocks in your portfolio is, you dilute and limit your upside potential! When markets crash (liquidity crises like 2020 or 2008/2009), then nearly everything drops (not everything).
Limited upside and full downside ist not what you want!
One last point: You should not expect me to be the so called “long-term investor” that follows the approach “buy and hold and pray” (no one calls it this way, but way to many are practicing this unfortunately) – meaning that sitting along on losses and losers, hoping that they reverse someday, being afraid to sell a loser (read: having to admit they were wrong) and being rather inflexible mentally.
Again, because it is so important: It’s all about understanding the investment case, having a good gut feeling (feeling comfortable with the investment) and proper risk management without losing common sense.
Keep in mind:
- when the situation has changed or potential catalysts do not materialize in time, then it is more often than not time to move on. Sell your investment and put your capital to work by investing in better opportunities.
- selling losers is often a good approach to clear your mind. What counts is the performance of your whole portfolio.
- hope is not an investment thesis (!). Either your old thesis is valid and you hold onto your investment or you have to throw you cards away. The one who turns over the most rocks, often finds better ideas.
- in every environment there are stocks that are rising or at least running sideways. Hence, I do not think it is necessary to be invested in losers during a bear market losing sleep and waiting for the bottom. One can also hedge against volatility (which mostly rises during declining stock markets). You have to be liquid at the bottom!
This is my approach.