Investment philosophy of the Magellan Infrastructure Fund.

Here is a summary of the investment philosophy of the Magellan Infrastructure Fund.

Core Investment Philosophy

The fund's principal objectives are to minimize the risk of permanent capital loss and to achieve superior risk-adjusted returns over the medium to long term. The philosophy is not based on traditional value metrics (like low P/E ratios) alone, but on finding "outstanding companies at attractive prices."

An "outstanding company" is defined as one with sustainable competitive advantages that allow it to earn returns on capital well above its cost of capital for a sustained period.

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Desired Characteristics for Investment (The "Lollapalooza Effect")

The fund seeks investments where several favorable attributes combine and reinforce each other, creating a powerful compounding effect. The ideal investment possesses the following characteristics:

1. Wide Economic Moat: The company must have a durable competitive advantage that protects its profits from competitors. This is evidenced by:

   • High Historical Returns on Capital: A track record of earning above its cost of capital.

   • Sources of Moat: Examples include high customer switching costs, significant economies of scale, strong brands/patents, proprietary networks (like toll roads or marketplaces), and psychological drivers of customer loyalty.

2. High Re-investment Potential: The company must have opportunities to reinvest its profits back into the business at high rates of return. The most valuable types are:

   • Capital-Light Growers: Businesses that can grow significantly without needing much additional capital.

   • "Compounding Machines": Businesses with wide moats that can deploy large amounts of capital at high incremental returns (e.g., a retail franchise with many new locations to open).

3. Low Business Risks: The fund prioritizes businesses with predictable cash flows and earnings. They assess risks from cyclicality, operating/financial leverage, and the regulatory environment to gauge the stability and predictability of the underlying business.

4. Low Agency Risk: This is the risk that management will waste the company's free cash flow on poor investments or empire-building rather than returning it to shareholders. The fund favors companies where:

   • Management's incentives are aligned with shareholders (e.g., through significant share ownership).

   • There is a strong track record of shareholder-friendly actions like dividends, share buybacks, or prudent acquisitions.

The Final Decision: Margin of Safety

Even if a company excels in all the above areas, the fund will only invest when there is a sufficient "Margin of Safety"—meaning the stock is trading at a significant discount to the fund's assessment of its intrinsic value.

• The required discount varies; for exceptional businesses with a strong "Lollapalooza" effect, a modest margin of safety may suffice.

• For companies with higher risks, a larger margin of safety is required.

• The fund capitalizes on market pessimism or short-term issues that cause a stock to be mispriced, allowing them to buy outstanding businesses at attractive prices.

How can you achieve consistent, high-level returns?

How can you achieve consistent, high-level returns?

Students of investing look for a formula.  Many students read both technical works and the retrospective testimonies of high-performing investors.

1.  The technical approaches:  A few good books have been written.  But reported technical investment approaches rarely, if ever, lead to consistent, high-level returns.

2.  The investment memoirs:  They tend to be long on philosophy and short on advice for how to buy particular securities.


Thus, in both areas, the students are largely disappointed.





Investment memoirs of successful investment practitioners

However, as the works of successful investment practitioners, the memoirs do have much to recommend them.  They describe non-specifically, investment approaches that worked in practice.  They capture an important aspect of investment success:  that it depends more on character than on mathematical or technical ability. This is the consistent message of investment memoirs of a group of successful investment practitioners.

The problem is that each memoir presents a unique perspective on the character traits necessary for investment success.  Different authors emphasize different characteristics:

- patience,
- coolness in a crisis,
- wide-ranging curiosity,
- diligence in pursuit of information,
- independent thought, broad qualitative as opposed to detailed quantitative understanding,
- humility,
- a proper appreciation of risk and uncertainty,
- a long time horizon, 
- intellectual rigour and balance in analysis,
- a willingness to live outside the herd, and 
- the ability to maintain a consistently critical perspective.


Unfortunately, an investor with all these qualities is a rare bird indeed.

The Investment Policy Statement

The Investment Policy Statement (IPS)

An investment policy statement is an invaluable planning tool that adds discipline to the investment process.

Before developing an IPS, an investment manager must conduct a fact finding discussion with the client to learn about the client's risk tolerance and other specific circumstances.

The IPS can be thought of as a roadmap which serves the following purposes:

• It helps the investor decide on realistic investment goals after learning about financial markets and associated risks.
• It creates a standard according to which the portfolio manager's performance can be judged.
• It guides the actions of portfolio managers, who should refer to it from time to time to assess the suitability of particular investments for their clients.

Major components of an IPS

• An introduction that describes the client.
• A statement of purpose.
• A statement of duties and responsibilities, which describes the duties and responsibilities of the client, the custodian of the client's assets, and the investment manger.
• Procedures that outline the steps required to keep the IPS updated and steps required to respond to various contingencies.
• The client's investment objectives.
• The client's investment constraints.
• Investment guidelines regarding how the policy should be executed (e.g., whether use of leverage and derivatives is permitted) and specific types of assets that must be excluded.
• Evaluation and review guidelines on obtaining feedback on investment results.
• Appendices that describe the strategic asset allocation and the rebalancing policy.

Philosophy of value investing. Need to have clear strategies too.

Buffett's first two rules of value investing:

1) Don't Lose Money

2) Never Forget Rule #1

While it is easy to say these rules, by themselves they don't help investors. 

The future is uncertain. 

These are always unknown:

• future GDP growth rates, 
• inflation rates, and 
• other relevant factors to stock price returns. 

Furthermore, stocks are junior securities to debt and other firm obligations, making their future values even more uncertain. 

Stocks are certainly not risk free.

The investors need to have clear strategies, which they can follow, that will help them follow the above rules of Buffett's.

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

Investment management process: 5 step procedure

Investment management process is the process of managing money or funds.

The investment management process describes how an investor should go about making decisions.

Investment management process can be disclosed by five-step procedure, which includes following stages:

1. Setting of investment policy. 

2. Analysis and evaluation of investment vehicles. 

3. Formation of diversified investment portfolio. 

4. Portfolio revision 

5. Measurement and evaluation of portfolio performance.


Ref:  http://www.bcci.bg/projects/latvia/pdf/8_IAPM_final.pdf

Ultimately, the best investment ideas will come from doing your own homework. You should not feel intimidated.

Investment success is not synonymous with infallibility.  Rather, it comes about by doing more things right than wrong.

The success in your investment approach is as much a result of eliminating those things you can get wrong, which are many and perplexing (predicting markets, economies, and stock prices), as requiring you to get things right, which are few and simple (valuing a business).

When purchasing stocks, you should focus on two simple variables:  the price of the business and its value.  The price of the business can be found by looking up its quote.  Determining value requires some calculation, but it is not beyond the ability of those willing to do some homework.

The wonderful thing is because you are no longer worry about the stock market, the economy, or predicting stock prices, you are now free to spend more time understanding your businesses.

More productive time can be spent reading annual reports and business and industry articles that will improve your knowledge as an owner.  The degree to which you are willing to investigate your own business lessens your dependency on  others who make a living advising people to take irrational action.

Ultimately, the best investment ideas will come from doing your own homework.  You should not feel intimidated.

Determining how to allocate your savings is the most important decision you, as an investor, will make.

My First Post in this Blog was on 1.8.2008 on the Investment Policies based on Benjamin Graham's teachings.

I started my blog on 1.8.2008 and my first post was:

Investment Policies (Based on Benjamin Graham)
Summary of Investment Policies
http://myinvestingnotes.blogspot.com/2008/08/investment-policies-based-on-benjamin.html

It was highly educational to blog during that period at the start of the global financial crisis.  There were so much uncertainties.  

However, when you have a philosophy and strategy to guide your investing that is sound and safe, it was a great time to see if this can withstand the onslaught of a severe bear market.  Actually, you should not fear the bear market.  You should fear the bull market instead.

In June 12, 2009, when the market had turned, I reviewed my investing for the previous 12 months.  Here are my lessons learned from the recent severe bear market.
http://myinvestingnotes.blogspot.com/2009/06/lessons-from-recent-severe-bear-market.html

Here are 2 articles to guide investing in the different phases of the stock market.
What to Do in a Up (Bull) Market?
http://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-up-bull-market.html

What to Do in a Down (Bear) Market?
http://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-bear-market.html

The Complete Investment System

A complete investment system has detailed rules covering these 12 elements:

1. What to buy
2. When to buy it
3. What price to pay
4. How to buy it
5. How much to buy as a percentage of your portfolio
6. Monitoring the progress of your investments
7. When to sell
8. Portfolio structure and the use of leverage
9. Search strategy
10. Protection against systemic shocks such as market crashes
11. Handling mistakes
12. What to do when the system doesn't work

The first test of your system is obviously whether or not it makes you money.  If your system is profitable, you'll be getting a return on your capital.

Buffett and Soros measure their performance against three benchmarks:

1. Have they preserved their capital?
2. Did they make a profit for the year?
3. Did they outperform the stock market as a whole?

The benchmarks you choose will depend on your financial goals.  When you have established your benchmark, you can then measure whether your system is working or not.

Your mental focus is: on YOUR INVESTMENT PROCESS

The Master Investor treats investing like a business: he doesn't focus on any single investment but on the overall outcome of the continual application of the same investment system over and over and over again.  He establishes procedures and systems so that he can compound his returns on a long-term basis.  And that's where his mental focus is:  on his investment process.  

Once you're clear what kind of investments you'll be buying, what your specific criteria are, and how you'll minimize risk, you need to establish the rules and procedures you'll follow to gain the Master Investor's long-term focus.


Bottom line:  Focus on your investment process  to compound your returns on a long-term basis

In order to be a successful investor, you need a proven, rational framework.

My Blueprint  

GregSpeicher

Ideas for Intelligent Investing

In order to be a successful investor, you need a proven, rational framework.

My Investing Blueprint has ten steps.

1. Search Broadly and Continually for New Investment Ideas.
2. Act Like an Owner.
3. Only Buy Things You Understand.
4. Buy Good Businesses.
5. Invest in Companies with Great Management.
6. Buy the Cheapest Business Available.
7. Focus on Your Best Ideas.
8. Practice Patience.
9. Avoid Stupid Mistakes.
10. Be a Learning Machine.

http://gregspeicher.com/?page_id=117

Click through the many good posts on each of these steps in this link.

Evaluating a Company (Methodology)

August 08, 2011

Evaluating a company

In this post, I will share with you my approach in evaluating companies whose stocks are listed on the Malaysian stock exchange.

My method for evaluation is based on what I have read from a few books, mainly:

1. The Intelligent Investor - by Benjamin Graham
2. How to Make Money from Your Stock Investment Even in a Falling Market - by Ho Kok Mun
3. Secrets of Millionaire Investors - Adam Khoo and Conrad Alvin Lim

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Privacy

I invest in Malaysian stocks for the long term and for dividends. I do not use a trading approach.

To hold for the long term, it is important that the company has good financial strength and profitability.

I use the following criteria to determine financial strength, which can be calculated based on the data from the latest quarterly report:

1. Current ratio > 1.5

where current ratio = Net current assets / net current liabilities

2. Working capital - LTD > 0

where Working capital = net current assets- net current liabilities
and LTD refers to long term debts or non-current liabilities

3. DE ratio < 0.5

where debt-to-equity (DE) ratio = non-current liabilities / shareholder equity

4. LTD/PAT < 3

where LTD means long term debts or non-current liabilities
and PAT means profit after tax ( I use the net profit attributable to shareholders, rolling over the past 4 quarters )

5. cash/debt > 0.3

where cash is the "cash and cash equivalents" in the balance sheet and debt = total liabilities (current and non-current)

The more of these criteria are fulfilled the better it is.

For profitability, I would prefer the following:

1. No deficit in last 5 years i.e. the company did not have a loss in the past 5 years

2. Annualized earnings growth of over 15%.
I would look at the earnings for the past 5 years. If there is a year or two when the profits dipped (e.g. due to the global financial crisis), that is alright, as long as the overall trend is increasing profits. I tend to avoid companies with cyclical earnings.

3. Increasing operating cash flow


Next, I will also look at the companies average return-on-equity (ROE) and return-on-revenue (ROR) of the past 5 years. I prefer the company to have better ROE and ROR compared to its peers in the same industry. According to Benjamin Graham, it is advisable to have ROE of over 15%.

For dividends I prefer the company pays out dividends every year. I would keep a few stocks that have a track record of paying dividends higher than FD rate for every year in the past.

Finally, if I think the company is good to buy based on my evaluation, I will then check the annual reports of the company for the past few years. I will try to understand the company's business and products, it's business segments and markets, it's director's compensation and it's shareholders. This part is rather subjective and I am still learning.

Source: 

http://malaysiastocks.blogspot.com/2011/08/evaluating-company.html

Cement Producers

August 13, 2011

cement producers

The top 3 cement producers listed on the KLSE are LaFarge Malaysia (LMCEMNT), YTL Cement (YTLCMT) and Tasek (TASEK). LMCEMNT has the largest market capitalization and revenue, followed by YTLCMT and TASEK. However, YTLCMT actually currently makes more profit than LMCEMNT, based on the rolling profit of the previous 4 quarters. LMCEMNT is a subsidiary of the world's biggest cement maker Lafarge SA, traded on the Paris bourse.

The following table compares them (using data from the lastest quarterly and annual reports.)



It can be seen that both YTLCMT and TASEK fulfill all our 5 criteria of financial strength (see my previous post). YTLCMT has the highest return on equity (ROE) while TASEK has the highest return on revenue (ROR). Note that both these figures are 5 year averages.

TASEK tends to have the lower historical PE ratio,perhaps due to its low trading volume and liquidity. The company is a subsidiary of Hong Leong Asia (which is owned by Tan Sri Quek), which holds something like 72% of the shares.

At current stock prices, YTLCMT and TASEK are trading below their average historical PE ratio. However TASEK had a gain on disposal of property amounting to 43m in 4QFY10. Without this one-time gain, it is trading at its historical average PER.

The catalyst for cement producers would be construction activities from the ETP govt projects. Risks include ceiling price by government and energy costs (coal, electricity, diesel).


As I am only sharing information, I will not make any recommendations. I also make no guarantee to the accuracy of the information given.


*Note that the historical PE ratio is calculated based on the financial year end's closing price.

Can You Sum Up Your Investing Philosophy in 10 Words?

By Jason Zweig

Associated Press

Abraham Lincoln in 1858

In a speech to the Wisconsin State Agricultural Society in Milwaukee on Sept. 30, 1859, Abraham Lincoln told this anecdote:

“It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride!—how consoling in the depths of affliction! ‘And this, too, shall pass away.’  And yet let us hope it is not quite true.”

I was recently reminded of Lincoln’s wonderful speech when someone asked me if I could summarize my investing beliefs in no more than 10 words. I laughed and said, “Of course not!”

But right afterward, I realized to my surprise that I could. I banged this out almost instantly:

Anything is possible, and the unexpected is inevitable. Proceed accordingly.

I asked some leading investors and financial thinkers for their own contributions.  Here are a few:

Determine value.  Then buy low, sell high.  ;-)

—David Herro, chief investment officer for international equities, Harris Associates, and manager of Oakmark International Fund

If everybody wants it, I don’t. Avoid crowds.

—Gus Sauter, chief investment officer, the Vanguard Group

Other people are smarter than you think they are.  Index.

—Laurence B. Siegel, research director, Research Foundation of the CFA Institute

Risk means more things can happen than will happen.

—Elroy Dimson, expert on long-term stock returns, London Business School, and co-author, “Triumph of the Optimists”

Invest for the long term and ignore interim aggravation.

– Charles D. Ellis, director, Greenwich Associates, and author, “Winning the Loser’s Game”

100% of business value depends on the future.

—Bill Miller, chairman and chief investment officer, Legg Mason Capital Management

Plan for the worst. Hope for the best.

—Robert Rodriguez, managing partner, First Pacific Advisors

Control what you can: your savings rate, costs, and taxes.

– Don Phillips, president, fund research, Morningstar

In the end, you cannot take your investments with you.

– Meir Statman, finance professor, Santa Clara University, and author, “What Investors Really Want”

The less portfolio management costs, the more you earn.

—Burton Malkiel, professor of economics emeritus, Princeton University, and author of “A Random Walk on Wall Street”

Own competently managed, competitively advantaged businesses at discounted prices.

—O. Mason Hawkins, chairman and chief executive officer, Southeastern Asset Management

Do the math. Expect catastrophes. Whatever happens, stay the course.

– William J. Bernstein, Efficient Frontier Advisors, and author, “The Four Pillars of Investing”

Fallible, emotional people determine price; cold, hard cash determines value.

—Christopher C. Davis, chairman, Davis Advisors and co-manager, Davis New York Venture Fund

New submissions are also coming in:

Save. Invest long-term. Compounding returns builds. Compounding costs destroys. Courage!

–John C. Bogle, founder, the Vanguard Group

Are you smarter than the average professional investor? Probably not.

– William F. Sharpe, emeritus professor of finance, Stanford University, and Nobel Laureate in economics

Finally, it’s worth remembering that the great investing analyst Benjamin Graham engaged in a similar exercise (also evoking Lincoln’s tale) but came in seven words under our maximum:

In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, ‘This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”

—Benjamin Graham, “The Intelligent Investor,” Chapter 20.

In the spirit of Lincoln’s classic anecdote, can you sum up your investing philosophy in no more than 10 words that you believe will be “true and appropriate in all times and situations”?

http://blogs.wsj.com/totalreturn/2012/01/27/can-you-sum-up-your-investing-philosophy-in-10-words/?mod=WSJBlog&mod=totalreturn