It is interesting to compare how different investors manage their portfolios. Many individual investors come across a stock that appeals to them for some reason – it offers an attractive product or service, or has management that is aligned with the investor’s values or is frequently promoted in the financial news and cocktail party chatter. The investor may buy the stock with just a feeling that the stock will “go up” and be sold in the future for a nice gain. This approach can be successful. All you need is for there to be another investor who has more dollars and less sense than you have.
When we look for stocks to buy, we don’t think about what we can sell it for but rather how likely it is that the business we are buying a piece of will be successful in its endeavours. Can the business earn a high return on the capital it has invested and more importantly, can it re-invest some or all of those profits in the business and earn the same high return on the reinvested profit? If so, the business will become more valuable over time and the value of our shares will reflect that in due course. Put another way, we are looking for the increase in value to come from the success of the business rather than from short-term fluctuations in market prices.
It’s important though to make sure that the value of that estimated future success is not already reflected in the purchase price of the shares we are buying. If we pay now for all future projected returns, we leave no margin for error or even a negative margin that must ultimately be overcome for a successful outcome.
That’s why we like to buy shares for less than we think they’re worth. It gives us a nice margin for error. Even if the business is not as successful or not successful as quickly as we expect, we can still have a good result. If we buy shares for more than what they’re currently worth, we have to hope that the business is more successful or succeeds faster than we expect, in order to realize the nice return we want.
Long-time clients will know that while this approach produces good results most of the time, it is not foolproof. Over our fifteen-year history, we have had our share of individual investments that didn’t work out as expected but portfolios as a whole nevertheless saw results over time that were quite satisfactory.
We quite like the companies in our portfolios and would be loath to sell one unless we could acquire another that offered a better reward-to-risk tradeoff. We would be delighted to add one or two new high-quality businesses to the portfolio if the opportunity presented itself. Unfortunately, these opportunities often appear when the prices of many securities – including the ones in our portfolio – are depressed and so selling these holdings to raise cash is unappealing. That’s why we’re happy to accumulate cash rather than deploy it in a knee-jerk fashion, simply to be fully invested at all times.
We like having sufficient cash in portfolios to act on opportunities when they arise without necessarily selling something else. Although cash currently yields little, we believe that our long-term success has been at least partially because of our willingness to patiently hold cash rather than in spite of it.
A portfolio consisting of a diverse mix of good quality businesses acquired at attractive prices together with a strategic cash holding is a portfolio that makes both dollars and sense.
|AVG Annual Return to June 30, 2021||1 Year||3 Years||5 Years||10 Years||Since Inception
Nov. 30, 2006
|Genova Private Management Composite||28.7%||17.2%||16.8%||16.6%||14.2%|
|S&P 500 Total Return Index (C$)||28.1%||16.3%||16.5%||17.8%||10.9%|
|TSX Total Return Index||33.9%||10.8%||10.8%||7.4%||6.3%|