Friday, December 9, 2016

At the corner of Buffett and Fisher

I’ve drawn a lot of inspiration for my investment strategy primarily from the Buffett and Fishers approaches. I’ll discuss here how I am applying them in my own unique way.
I’ve been reading and drawing inspiration from a lot of different legends in the investment area over the last several years however I think the approaches that have most resonated with me are those that have been utilized by Warren Buffett and Philip Fisher, and to a slightly lesser extent Charlie Munger.
Well I don’t claim to have anywhere near the investment acumen of the three legends of investing. There’s something very unique about how each of these investment giants approaches investing that’s relatable and that gives me confidence to persist with such an approach.
From Buffet and Munger I’ve tapped into a discipline of starting out with businesses that are drowning themselves in the weight of cash that they throw off. That means that they have unique control over their destiny and are not dependent on external conditions.
I’ve also learned to look for good stewards of capital. The businesses that are disciplined in generating good returns on invested capital and solid margins and profitability. They also are businesses that are generating respectable growth in revenue and operating cash flow.
I have also become more attuned to buying these businesses at prices that make sense. I’m more wary these days of spending up for businesses that are showing exceptional growth but that are also trading at exceptionally high multiples because I’ve learned that those target rates of growth can decline suddenly and that even buying very good businesses at poor prices can lead to dead capital for a prolonged period of time.
My more Buffet like purchases have been solid large-cap growth businesses with enduring economic moats, bought at times of market panic or specific situations which have adversely impacted the stock pricing.
These buys include MasterCard and Visa during concerns about the impacts of Durbin and Watson on their ability to price credit transactions. It also includes the purchase of Priceline during concerns over Brexit, Zika and acts of terrorism that have hit the stock over the last 12 to 18 months. Finally I put my purchase of Ali Baba during the rout of Chinese stocks very early on this year also into this category.
Of course Buffet is famous for his aversion to technology focused stocks.  Thus claiming that these purchase have been influenced by Buffet methodology is probably a strange claim to make.
However in my view, I believe that there are grounds for claiming that these businesses in particular possess many of the claims or attributes that could actually make them Buffet like purchases.
Buffet notes that he has an aversion to technology stocks largely because it’s hard to predict with any clear level of certainty what their economics will be like.  With the nature of technology disruption being so rapid that new technologies emerge in a relatively short space of time to unseat the incumbent.
While this may be true, I’ve looked for certain types of technology companies and certain characteristics associated with these technology companies in making my purchase. Specifically I’ve looked for the existence of a network effect.
Network effects make a business more valuable as more participants join a platform. Institutionalizing network effects can actually help prevent a better and more sophisticated technology from unseating an incumbent who has built-up these network effects.
Platform users will typically be really reluctant to leave a platform even in the presence of a technically superior alternative if the rest of the network have not already made that move. Priceline MasterCard Visa and Ali Baba are all blessed with network effects of the highest order and the incremental acquisition of more users and more merchants just helps reinforce those network effect.
So again while buffet doesn’t claim the deployment of his methodology for technology stocks I’ve chosen to apply his framework into a set of technology businesses that I believe have long-term favorable economics due to specific competitive position.
While a Buffet inspired methodology applied to technologies growth stocks that are slightly more mature accounts for the bulk of my non-index based, non-dividend focused portfolio, I have also taking inspiration from Philip Fisher’s approach to trying to uncover early-stage growth businesses that are growing at superior growth rates and are well-positioned for longtime outperformance.
In my purchase of these businesses I haven’t been exceptionally concerned with a robust discipline of acquisition at bargain basement prices. This is because the purchase of these businesses at an early enough stage in the growth cycle should make up for any deficiencies with respect to valuation, providing the growth continues through the medium term and one has a long-term holding period.
Fisher advocated for buying strongly growing early stage businesses at prices that may appear objectively high. He suggested that the young growth stock, carefully selected, will significantly outperform more mature growth businesses.
Investors merely need to pick and retain those businesses over long periods of time to truly compound massive wealth. Specifically, he suggested not being discouraged from buying at high prices and assuming all future growth has been priced in. This is particularly true with early stage growth businesses that have strong long term drivers that may look expensive on the surface.
My purchases of Aconex and Wisetech have been influenced strongly by this approach and philosophy. While such businesses may not have neat fit with Buffet methodology as they were very early stage, and without longevity of revenue and earnings, I see the beginnings of something really strong here that encouraged me to buy significant holdings of both.

This article was written by Financially Integrated. If you enjoyed this article, please consider subscribing to my feed.

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