One of the greatest ever investors, John Templeton generally focused on what a company could earn two to five years down the line. Warren Buffett intends to hold most of his portfolio constituents “forever”. On the other hand, the great majority of share traders look to the short term – what is going to happen to earnings next month or next year.
By looking to the medium-term and long-term you filter out short-term noise that is currently pre-occupying the market. Taking a longer view gives the bargain hunter a psychological edge, allowing the exploitation of temporary problems in business.
By asking about the company’s strategic position and the quality of management in terms of their focus on long-term shareholder value you gain a superior perspective relative to traders in the market.
The sorts of questions you are forced to answer include: What gives this company a competitive advantage? Will they maintain their earnings power over a long period, in bad times as well as good? Is the quality of the brand such as to provide durable pricing power?
In defining ‘value’ John Templeton said he tries to work out his best estimate of earnings in five years time. He then would pay no more than five times this figure for the shares. Buffett calculates intrinsic value by discounting future cash flows over the next few decades – he does this in a rough a ready way in his head without paper or calculator on the same principle that you don’t need to weigh people to know if they are grossly over-weight.
These great investors’ approaches have the advantage, when buying into companies reporting problems and therefore diminished share prices, of distinguishing between those with temporary, solvable, problems and those with a deep-seated strategic disadvantage or unattractive industry economics.
Investors versus speculators
Both Templeton and Buffett tell us to invest and not to speculate. The stock………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk
investing is about making the right decisions, not many decisions.