SIA pursues a value approach which it combines with a rigorous and in-depth analysis of the strategic positioning of every company it invests in. The toolbox for this strategic analysis has been built over the past 20 years by SIA’s founders. With this approach, SIA takes the perspective of a business owner.
We believe that there are two essentially different approaches to successful investing. We call the first “trading” and the second “strategic investing”.
In a “trading” strategy, profitability is obtained from simply selling any asset at a higher price than it was bought for.
In a “strategic investing” approach, on the other hand, profitability is obtained from an asset because the asset produces rents. This may be an apartment’s rental, or a corporation’s annual after-tax profits. If the latter, the owner does not receive all the profits in cash, for companies normally reinvest at least part of their profits. But as long as the profits are reinvested and earn a positive return, they are increasing the investor’s wealth, much as an apartment’s rent income can be used to buy more apartments. What matters is not the change in the asset’s price, but the income that the asset generates over time. That’s why “strategic investing” can also be called the “intrinsic profitability approach”.
Of course, the two strategies can be combined: one may be able to buy an apartment, collect rental, and later sell it at a higher price. Nevertheless, it is important to separate the two sources of profitability, for the skills needed to actually achieve them are completely different.
In a “trading strategy”, the key to success is to “know” what the asset’s price will be in future. It essentially implies guessing what the market will do. Not surprisingly, it is often called “speculation”. In essence, so-called “technical analysis” is concerned with this approach: by looking at a given asset, or other, related assets’ current and past prices, a “bet” is placed on the future price. The skills needed, therefore, have a lot to do with technical analysis, trading techniques or, at least, a deep understanding of an asset’s supply and demand behavior, that will finally determine the price.
With an “intrinsic profitability” strategy, the required skill consists of estimating what the future profits of the asset will be. In the case of the apartment, this implies estimating the level of future rents, and as far as a company is concerned, its profits. This requires the capacity to analyze a given business strategically, to evaluate the quality of its management, and to incorporate the industry’s likely evolution. If someone is able to predict companies’ future profits with more accuracy than most people, can detect inconsistencies in the market price in respect of those companies’ shares, and buy and sell accordingly, profits can be made.
Strategic Investment Advisors intends to produce high returns for its investors by following the “strategic investment” approach: we will never recommend buying shares in a company merely because we think somebody would be prepared to pay more for them in future.
We will recommend them because we are convinced they represent a participation in a business that is going to produce good profits over the following years. Similarly, we will not recommend selling simply because we think the share price will go down: as long as we believe that a company’s intrinsic profitability will remain satisfactory, we will not advise anyone to sell.
Indeed, we start with the premise that we have no expertise whatsoever in predicting what the market will do in the short to medium term, either on average or with regard to specific securities. We therefore do not, recommend the purchase of “shares that will go up” in the short term, because we do not know which ones will. In fact, we make an effort never to hold shares that we believe will not yield a good intrinsic return, just because “the market” is likely to value them more highly in future. We will only recommend the purchase and holding of shares that we believe can “yield” our target of 10-15% profitability over the long term.
This philosophy requires a long-term approach. Over the years, the market has shown a clear capacity to unpredictably miss-price shares.
Thus, our recommendations will not try to “outguess” the market, but concentrate on correctly anticipating the chosen companies’ profitability. Experience shows, however, that over prolonged periods, shares prices tightly correlate with their long-term profitability.
Common characteristics of the funds we manage
Consistent with the above philosophy, investors in the funds we advise must take a long-term approach. If the companies that we recommend are well chosen, and bought at a low price, long-term profitability will be good. But this does not, of course, prevent price fluctuations, which are sometimes important. To satisfy the investors’ different needs, the various funds that we advise treat those fluctuations differently, in some cases ignoring them, in others trying to eliminate them. Nevertheless, all funds should always be regarded as long-term investments, unsuitable for short-term speculation.
We recommend little trading within the funds: the companies are kept for a long time, only sold if we believe their profitability has irreversibly deteriorated, or if a high selling price will offset future profits and there’s no longer any justification for keeping them. Another important point is transparency. The funds we advise are not “black boxes” in which investors put their money, with an expectation of appreciation (that would be “speculative investing”). These funds are collections of good companies, carefully selected, and bought at low prices, and this is how our investors should regard them.
Not only are all these points explained in detail in our quarterly newsletters, it also details the operations carried out in the funds (the sale and purchase of companies). Investors are strongly encouraged to read them, and to peruse the previous issues that are also available on this web site. The more investors know of how they invest their money, the more comfortable they feel, and the better the decisions that they can make.