Investment Philosophy

Risk is inherent in every human endeavour and investing is no different. Accepting a certain amount of risk – the probability of an unexpected event occurring – while making investments is inevitable. Conventional thinking is that investment risk is the volatility of asset prices. Not true. Investment risk is the probability of permanently losing or impairing investment capital.

At VAM our primary and overriding objective is to minimize the probability of permanently impairing and losing capital.

How do we do that?

• Using a repeatable process for identifying and managing investments
• Defining clearly the criteria to identify high quality companies
• Ensuring through a checklist approach, that all investment and risk aspects are considered
• Determining the intrinsic value of securities being considered
• Buying only at an appropriate discount to that value
• Investing globally, unconstrained by size of the company, sector or geography
• Owning high quality securities permits holding through market cycles, allowing value to emerge
• Trading infrequently; Low portfolio turnover means lower cost and lower tax incidents
• Selling in a disciplined manner

Benjamin Graham, expressed our thinking best “In the short term the market is a voting machine but in the long run it is a weighing machine”. Markets tend to behave in a bizarre manner over short periods of time but are more rational over longer time frames. By focusing on the elements that drive value over years rather than the elements that drive price over days or weeks, greatly increase the probability of success of our investment portfolio.

Our investment horizon is typically three to five years or roughly a market cycle.  Over this time frame we aim to produce a superior return, by which we mean growing purchasing power.

Volatility is not the exclusive preserve of equities. At different points in time other asset classes including bonds and real estate have proven to be more than adept at destroying capital. Investment gurus including Warren Buffet have said that at the current price levels of sovereign bonds provide “return free risk”. Investors today are not compensated adequately for bearing the risk of owning bonds in an interest rate environment manipulated by central banks. In addition, Sovereign nations have routinely failed to honour their obligations and some are serial defaulters. Developed nations have routinely inflated their way out of debt obligations thus severely limiting real returns to bond holders.

Equities, as an asset class and especially relative to other classes have compensated investors, over time, for the risk they bear. And, the more careful the investor, the better the returns from equities.

When it comes to accepting risk it is not owning the asset class that eliminates or reduces risk, rather, it is adopting a clearly defined process, with clearly defined investment characteristics that determine the level of risk and ultimately the returns generated.