Meet Jon Mills

Here's my approach to value investing.

Every analyst has a preferred investing philosophy. Here is mine.

I first became fascinated by the stock market as a teenager and resolved to learn as much as I could about how to become a successful investor. Yet the amount of advice out there – often different and conflicting – soon became overwhelming.

Happily, I soon stumbled upon Buffett: The Making of an American Capitalist by Roger Lowenstein at my local library. Telling the story of Warren Buffett – perhaps the world’s greatest investor – this book introduced me to value investing. Like many people who catch the value investing bug, it was as if a light went off in my head: value investing seemed so logical and rational compared to other strategies.

Buffett was a student and then an employee of Ben Graham, the author of Security Analysis and The Intelligent Investor and generally regarded as the founder of value investing. Using Graham’s teachings, Buffett soon struck out on his own and over the years developed his own version of value investing. You can get a good summary of his views by reading his letters to Berkshire Hathaway shareholders.

At its most basic, value investing is about buying $1 for 50 cents. This principle isn’t very ground-breaking of course, and most investors will say that’s what they’re trying to do. Human nature being what it is, however, most are trying to supercharge their returns by second-guessing where the market will look for value next.

There’s nothing much wrong with this, but it ends up with the market chasing its tail in the short term, when true value is defined by what happens over the long term. And this is what gives genuine value investors their opportunity.

Sometimes investors can get so caught up in the short term that they fail to take proper account of a company’s long-term prospects. At the “deep value” end of the spectrum that might be because a company isn’t quite as bad as the market thinks; at the “quality” end it might be that its prospects are even better.

Investors often fail to consider what can go wrong. For example, due to its revolutionary product or the size of its potential market, a company may be perceived to have a great future and priced accordingly. However, considering the potential downside means analysing whether the company has a durable competitive advantage, perhaps due to its valuable brand or because of network effects, that makes it very difficult for competitors to attack it.

Some prefer to define themselves as “deep value”, whereas others prefer looking for “quality”. I tend to be happy to look for both. The holy grail is to find a high quality business selling cheaply but such opportunities are rare, with the last being during the worst of the GFC in 2008 and 2009 when almost everything was on sale.

Psychology is important

With enough effort, any reasonably intelligent person can learn accounting principles and how to analyse a company’s financials, the quality of its management, its industry and competitors, the impact of regulation and so on. What separates successful investors from everyone else is their ability to put it all into practice when greed and fear are alternately gripping the market. The runaway emotion and irrationality of other investors creates the opportunities, but to take advantage you have to control your own emotions and stay rational.

This is because doing what everyone else is doing in the stock market is likely to lead to similar results to them: popular stocks are unlikely to offer a margin of safety, whereas avoiding stocks that most other investors are avoiding is likely to result in many good opportunities being missed.

So many of the stocks I’ll recommend are likely to be unpopular with the majority of investors, brokers and market commentators. This may be because they’ve encountered problems that are nevertheless short-term and fixable, or perhaps because earnings are currently depressed due to increased investment in current or expansion markets. It may also be due to investors overreacting to competitive or macroeconomic concerns, or even because the stock in question is just plain boring.

Two examples of stocks that I purchased for my personal portfolio are Virtus Health (read an update for the stock here) and PM Capital Asian Opportunities Fund (read more here) and my thoughts on them are similar to those of colleagues James Samson and Mitchell Sneddon.

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