More Detailed Investment Strategy
As the Forager name suggests, our style of investing involves scouring the world looking for undiscovered opportunities. In assessing these opportunities, we find both asset backing and earnings power are useful valuation tools, depending on the type of business we are investing in.
We like buying smaller, less well-known businesses that may provide opportunity for higher returns. The majority of companies within our portfolios tend to be small and mid cap stocks of this nature.
We also like buying more liquid large cap stocks if they are available at reasonable prices. These types of business add resilience to the portfolios, and can provide an important source of liquidity in volatile markets where better opportunities may arise at the smaller end of the market.
Combining these different types of businesses results in more robust portfolios.
Our small size gives us the flexibility to combine these types of businesses into our portfolios. If the potential returns are high enough, we have no qualms investing in unknown businesses. And if the situation demands it, we are prepared to be activists in order to realise the value inherent in a company’s shares. This approach has worked well for us over the years.
Our aim for both mid to large liquid businesses and smaller less well-known companies is to buy shares at prices we believe to be substantially less than their underlying value. Then we wait for the market to correct this mispricing.
This is more difficult than it sounds, which is why we have a rigorous research process and healthy debate within the team. Businesses change and stock valuation is an inexact science, so we only invest in stocks where the gap between our estimate of its value and the current share price is large enough to compensate for the uncertainty.
Valuations Based Investing
Valuations based investing is the method of investing practiced by Forager. It requires a business-like approach, an independent mindset and patience.
Share prices represent what it costs, at one point in time, to buy a tiny proportion of a company listed on the stock exchange – a company that employs people, produces goods or services and, hopefully, generates revenue, profit and cashflow.
Alongside this quoted stock price, value investors also take account of a company’s underlying, or ‘intrinsic’, value. Unlike the stock price, you can never get an exact fix on this figure but you can sometimes make a reasonable estimate by undertaking fundamental analysis. This involves looking at a company’s financial statements over time and making an assessment of its management, markets and growth potential.
Share prices vary enormously over the course of a year. But a business’s revenue, profit and cash flow rarely change anything like as much as its share price. The reason for this is that the price of a company’s shares is only a reflection of what people are willing to pay for them at any given time. Sometimes, usually when prices are rising, people are greedy. When prices fall, they become fearful and rush for the exits.
All this emotion can push the share price a long way from the intrinsic value of the underlying business. We aim to benefit from this by buying shares when they’re trading at significantly less than what we believe their intrinsic value to be.
In recent years, value investing has become synonymous with stocks trading on low multiples of their earnings or at large discounts to their tangible assets. As described above, Forager’s approach is far broader than this and frequently incorporates investing in businesses that are growing and, sometimes, trading at superficially high multiples of their current earnings. As such, Forager’s returns are unlikely to be correlated with broad “value” indexes or exchange traded funds.
Why This Works
If valuations based investing works so well, why doesn’t everyone do it? Because, whilst the concepts are easy to grasp, putting them into practice is hard.
Most investors view falling share prices as a bad thing, a signal that a company is failing in some way.
Successful valuations based (or value) investors need to see through the negativity and put the opinions of the crowd to one side, looking at a situation with cool-eyed dispassion.
But because humans are hard-wired to follow the crowd, most can’t do that. Valuations based (or value) investing works because most investors are not psychologically equipped to practice it.
That is why Forager’s loyal investors let us do the hard work for them. They get the benefits of an investment team naturally wired to buy when others are panicking and sell when the crowd is euphoric, and avoid the emotional trauma of trying to do everything themselves.