Investing is simple. You want to buy something for less than its worth. But once you start putting the definitions into practice, that’s when things get hard. The problem many investors run into lies with determined value and price.
A company jumping into a new market with a highly demanded product is likely on its way to grow. But how do you value such a business? Future revenues could be anywhere from $10–100 million. You also have to factor in how competition might affect the company’s sales. You’d probably also have to think about how scalable the business model is. Meaning, how much does it cost to increases sale by X?
As you can see, there are many variables. I’m not saying you won’t be able to come up with an estimated value for the company, but how confident are you when you have to assume so much?
Surely a better way would be to focus on more predictable outcomes. For example, you might look at a stock that has missed its earnings guidance, but, over the past 10 years, the company has averaged steady, reliable income and regularly pays dividends out to shareholders. The only reason it might have missed its earnings guidance was due to wider economic factors.
The keep it simple principle
In the wake of the 2008 financial meltdown, Josh Best and Mike Surridge were brainstorming names for their new hedge fund. It probably wasn’t the best time to start asking investors for money. They had just lost thousands, if not millions, as the market turned down.
As of October 2009, their fund had around $5 million in capital and a name — KIS Capital Partners. The name comes from a phrase everyone knows: Keep it simple. And that’s exactly how the fund invests — in simple investments the partners understand.
As reported by The Australian Financial Review:
‘…Best likens the approach to “hitting singles” in cricket with most positions limited to about 2 per cent of the portfolio and lasting a matter of months. At any given time, KIS has more than 40 active positions.
‘“These trades might make us 10 or 20 bips [basis points] but we are only trying to make 1.2 per cent a month, which turns out to be 15 per cent a year,” says Best.’
15% may sound boring. But within five years, 15% annually can more than double your money. And within 10 years, with 15% annually you can quadruple your money.
How does the phrase go? Slow and steady wins the race?
Junior Analyst, Markets & Money
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