Investment Strategy for Wall St. Nerds

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Investment Strategy




Business Perspective Investing

Investment Strategy

Every investor pursues a certain type of investment style and develops an existing one further according to their personal orientation. My investment strategy is based on the value investing approach. However, I prefer the more developed version, namely the Business Perspective Investing method, which, in contrast to Benjamin Graham's classic version, focuses on the economic situation of a company and the underlying stock price.

P.S. In my investment strategy explanation, I use both terms in context with the same meaning — Value Investing = Business Perspective Investing.

Introducing my Investment approach

My Investment Strategy

My investment strategy is geared towards building long-term wealth through focused investments in equities. In doing so, I am guided by the “Business Perspective Investing” approach, which is characterised by many value investors such as Warren Buffett. In the following, I will explain the exact background to my personal investment strategy.

Directly investing in the economy.

I focus strictly on direct stock investments, where I am actively involved in companies and make independent investment decisions. Unlike funds or ETFs managed by professionals, I selectively choose excellent businesses to invest in, rather than diversifying broadly across the entire market. For me, stocks are not speculative assets but represent a share of ownership in a company. Each business year, companies generate significant value, distributed to employees (through wages), the government (through tax revenues), and owners (through capital returns). By acquiring stocks, I gain an additional source of income on top of my regular salary.

Directly investing in the economy.

The concept of business perspective investing

I follow the investment strategy of business perspective investing, whereby I view each investment as a stake in a company that has employees, products, customers, and assets. My analysis focuses on a detailed examination of the underlying company in order to understand the business as comprehensively as possible. Only when I have developed a solid understanding of the company's sustainable profitability, growth prospects and risks do I venture into valuation. The main objective of the valuation is to determine a price range within which I can expect a reasonable and long-term profitable return on my investment.

The concept of business perspective investing

Observing many companies.

I practice stock analysis as a recurring process that I perform as often as possible. By churning through a lot of information, I increase the likelihood of making a valuable find among the many data sources - be it an undervalued stock of an excellent business or a "nugget of gold" in the form of a promising investment opportunity. Sometimes a stock already appears attractive for a long-term entry at the time it is analysed. However, the price is often not (yet) ideal at this point in time. For this reason, all the companies analysed keep their place on my watch list so that they can be checked again in future for potentially favourable entry opportunities.

Observing many companies.

Being patient is a part of the process.

In line with the words of Charlie Munger, who emphasised: "The big money is not in the buying and the selling but in the waiting.", I take a patient approach. I monitor the stock price development and operating performance of the companies I analyse at regular intervals. My experience has shown that there are always windows of opportunity or special events during which even solid companies can be acquired at a fair price. I carefully identify these opportunities and share my findings in my blog to let other investors participate in my approach and observations.

Being patient is a part of the process.

More cash flow, more independence

Once I have decided to invest in a specific company, I follow the entrepreneurial development of the company over the long term. I participate in the value creation through dividends and the increase in the company's value. Over the years, I continue to expand my ever-growing portfolio of equity investments. This enables me to generate a continuously growing income from capital gains. My strategy focuses on companies whose cash flow increases over time. In other words, I invest in a type of equity bond with an increasing coupon. This approach allows me to become more free and independent year after year.

More cash flow, more independence

How do I recognise excellent companies?

Principles of value investing

"The success doesn't come overnight. It takes a certain amount of time. Understanding that is already a success."

Alexander
Alexander Kelm
Founder of Wall St. Nerd
principles of value investing

In accordance with the principles of value investing and business perspective investing, I look for several key characteristics when identifying excellent companies. An excellent company is characterised by clear financial stability, sustainable competitive advantages and efficient management.

understandable business model

It is very important to me that the company has an understandable business model. I prefer companies whose business principles are easy to understand, as this helps to better assess potential risks.

Competitive advantages

Another key feature is the existence of long-term competitive advantages. I look for companies with an economic moat, be it through strong brands, network effects or cost-efficient production methods.

Conservative financing

The financing of the company also plays a decisive role for me. Conservative financing, low debt and a balanced ratio of equity to debt capital signal financial stability and resilience to economic fluctuations.

A sustainably high return on equity

A sustainably high return on equity is another criterion that I take into investment consideration. I prefer companies that are able to generate returns for their shareholders over a long-term period. This indicates efficiency in the use of capital and potential competitive advantages.

reinvest profits to create more value

Whether a company retains its profits is also important to me. I tend to prefer companies that reinvest profits to create more value in the long term, rather than distributing them as dividends.

A successful management

The company's management plays a key role in my valuation. I look at the management's ability to freely dispose of retained earnings and make smart investment decisions. A successful management is able to increase the value of the company through expansion, innovative projects or the buyback of its own shares.

Inflation resistance

I consider a company's ability to make price adjustments in line with inflation to be another indicator of competitive advantage. Companies that can react flexibly to changes in price levels appear to me to be in a better position to protect their profitability.

sustainable shareholder value

Overall, I take a holistic approach that encompasses financial ratios, competitive position, management quality and long-term prospects. In my view, companies that fulfil these criteria have the potential to create long-term, sustainable shareholder value.

9 questions to identify an excellent company

When identifying an excellent company, the questionnaire from the book "Buffettology" is also happily used in my investment approach. The following 9 questions are intended to help identify excellent companies.

DOES THE BUSINESS HAVE AN IDENTIFIABLE CONSUMER MONOPLY?

It will either be a branded product or a specialised service that consumers or other companies rely on.

ARE THE EARNINGS OF THE COMPANY STRONG AND SHOWING AN UPWARD TREND?

I am looking for a company here with a sustainable high earning per share. The earnings per share should reflect an upward trend and show no significant fluctuations.

IS THE COMPANY CONSERVATIVELY FINANCED?

This means that the company should have little debt, maintain an appropriate ratio of equity to debt, and generally have a solid financial structure. A conservative financial management can indicate that the company is less susceptible to financial risks and is better positioned to withstand challenging economic times.

DOES THE BUSINESS CONSISTENTLY EARN A HIGH RATE OF RETURN ON SHAREHOLDERS' EQUITY?

I prefer companies that can achieve high returns on equity over a long-term period. A sustained high return on equity indicates that the management is using capital efficiently and that the company has competitive advantages that enable it to operate profitably.

DOES THE BUSINESS GET TO RETAIN ITS EARNINGS?

I prefer companies that retain their earnings and do not immediately distribute them as dividends to their shareholders. This is because companies that reinvest their profits, especially for growth and expansion, can create more value in the long run. The idea is that if a company has good opportunities for profitable growth, it is better to retain the earnings within the company rather than distributing them as dividends. This approach allows the company to increase shareholder value and strengthen long-term competitiveness.

HOW MUCH DOES THE BUSINESS HAVE TO SPEND ON MAINTAINING CURRENT OPERATIONS?

The question of the investment required to sustain ongoing operations relates to how efficiently a company can utilize its resources to keep its business running. I prefer a company that can maintain its operational activities with a moderate investment outlay. A lower investment requirement suggests that the company is less capital-intensive and operates more efficiently, potentially leading to higher returns for shareholders in the long run. This aspect emphasizes the importance of capital efficiency in evaluating companies from a Value Investing approach.

IS THE COMPANY FREE TO REINVEST RETAINED EARNINGS IN NEW BUISNESS OPPORTUNITIES, EXPANSION OF OPERATIONS, OR SHARE REPURCHASES? HOW GOOD A JOB DOES THE MANAGEMENT DO AT THIS?

The ability of a company to have discretion over retained earnings and reinvest them in new business opportunities, operational expansion, or stock buybacks is a crucial aspect of my investment strategy. Effective management should be capable of making wise decisions on how the earned profits can be best utilized to create long-term shareholder value. This includes the ability to invest in profitable projects, sensibly expand the business, and, if deemed appropriate, repurchase shares when management believes they are undervalued. Assessing management's proficiency in this regard is critical for the long-term health and success of a company.

IS THE COMPANY FREE TO ADJUST PRICES TO INFLATION?

The question of flexibility in adjusting prices to inflation relates to whether a company is able to adjust its prices flexibly to changes in the price level. This could indicate that the company has a competitive advantage. Companies that are able to adjust their prices to inflation can maintain their profitability in the long term and thus protect the real value of their business. This aspect emphasises the importance of a company's long-term stability and resilience.

WILL THE VALUE ADDED BY RETAINED EARNINGS INCREASE THE MARKET VALUE OF THE COMPANY?

Yes, according to the principles of Business Perspective Investing, the increased shareholder value from retained earnings should also increase the market value of the company. The idea is that the reinvested profits help to promote the long-term growth and profitability of the company. If a company successfully invests in projects that generate a positive return, this will increase the company's market value in the long term.

When is a stock worth buying for me?

The decision to buy a stock should be made carefully and based on a comprehensive analysis of various factors. Here are some key aspects I consider in my decision.

Return Expectations

Before purchasing a stock, I define clear return goals. This helps me structure my expectations and assess whether the potential return aligns with my investment objectives.

Willingness to Take Risks

The willingness to take risks is a crucial factor. Depending on my risk tolerance and personal preferences, I can decide whether I want to focus more on conservative or growth-orientated stocks.

Focus Investing

I prefer to focus only on industries and markets that I understand. Once I decide on a company, I invest a larger sum of money. I don't find having numerous stocks in my portfolio beneficial, as it can lead to a loss of overview. Additionally, managing a portfolio with many company holdings becomes more complex. I aim to keep portfolio management simple.

Investment Horizon

The investment horizon plays a crucial role. With a long-term investment horizon, I may be better able to tolerate short-term fluctuations and benefit from long-term growth trends.

Available Investment Amount

My available investment amount influences my decision on how much capital I want to invest in a particular stock. An adequate risk management requires a careful consideration of my investment amount.

Interest and Time for Wealth Building

Interest and the available time for personal wealth building are crucial. If I can and want to actively engage with my investments, more options may be available to me. On the other hand, an active approach also requires corresponding commitment.

Expertise & Knowledge of Countries, Industries, and Companies

My expertise and knowledge of countries, industries, and companies are fundamental. A thorough analysis of the economic conditions, the industry, and specific companies helps me to make substantiated decisions and minimise risks.

Overall, I integrate these factors into my investment strategy. This strategic approach allows me to pursue my financial goals while considering my individual preferences and circumstances. Through a thorough analysis and weighing of these factors, I can better assess when a stock is worth buying for me.

How do I value my stocks

I value my stocks based on the principles of value investing and thus follow a comprehensive approach that includes various key characteristics and strategies.

Deep Understanding Of The Company

Firstly, it is crucial to develop a deep understanding of the company. This means not just looking at the surface, but understanding the business model, the industry, the products or services and the long-term competitive advantages. A solid knowledge of the company is the starting point for any meaningful valuation.

Fundamental Analysis

Fundamental analysis plays a central role here. I look at key financial figures such as revenue, earnings, profit margins, debt and cash flow. This allows me to assess the financial health of the company and find out whether it has solid foundations.

Intrinsic Value

Determining the intrinsic value of the company is another key step. This value is based on a comprehensive analysis of the business prospects, the quality of the management, the long-term competitive advantages and other fundamental factors. I also take future cash flows and growth prospects into consideration.

Margin Of Safety

To minimize risk, I always consider a margin of safety. This means that the current market price of the stock should be significantly below my estimated intrinsic value. This buffer protects against uncertainties and unforeseen events.

The Quality Of Management

The quality of management is a key criterion. I analyze the management's track record, its past strategic decisions, and its ability to increase the long-term value of the company. Responsible and competent management is crucial for the success of the company.

A long-term perspective

A long-term perspective is essential. I avoid being influenced by short-term trends or market movements. Value investing emphasises the importance of a long-term investment horizon in order to benefit from the long-term fundamentals of a company.

The Peer Group Analysis

The peer group analysis and industry analysis help me to consider the company in a broader context. This allows me to assess how the company performs compared to its competitors and within its industry.

Sustainable Competitive Advantages

The search for competitive advantages is another focus. Companies with sustainable competitive advantages, whether through strong brands, cost-efficient production, or other factors, often have the potential to be successful in the long term.

Special Features of My Investment Strategy

BUSINESS PERSPECTIVE INVESTING

My investment strategy is characterized by various distinctive features that reflect my approach and priorities.

Alexander
Alexander Kelm
Founder of Wall St. Nerd
Long-Term Thinking and Acting

A central principle of my strategy is a long-term approach. I don't just view investments in the short term but evaluate them in the context of long-term developments. This orientation allows me to benefit from long-term trends and overcome short-term volatilities.

BUSINESS PERSPECTIVE INVESTING

My investment approach is strongly characterised by entrepreneurial thinking. I see myself as a shareholder in the companies I invest in. This helps me not only to determine the current value, but also to understand the long-term potential and strategic direction.

Theme/Cluster-Oriented Approach

Another feature of my strategy is a theme- or cluster-orientated approach. I don't just focus on individual companies, but also look at broader themes or industry clusters. This allows me to also look at position 2 or 3 within the industry, which might be much more interesting for an investment.

value investing philosophy

The value investing philosophy is a central element of my investment strategy. I look for companies that I believe are undervalued and offer long-term growth potential. The valuation of intrinsic value and the pursuit of a margin of safety are fundamental principles to ensure that my investments are based on a solid foundation.

Clear Guidelines in Investing

My investment decisions are based on clear guidelines. I have predefined criteria (as mentioned several times) and valuation methods that I apply in selecting my investments. This creates clarity and consistency in my decision-making process

Leave Emotions Aside

An important aspect of my strategy is the ability to leave emotions out of my investment decisions. Through a rational and disciplined approach, I aim not to be influenced by short-term market fluctuations or sentiments. This enables me to make long-term-oriented decisions.

When to exit my investments

There are various events on the financial markets that make investors think about selling their shares in a company. 5 reasons that motivate me to sell my stocks:

Changes in Business Prospects

If the long-term business prospects of the company deteriorate significantly or significant changes occur in the industry, this could be a reason to exit. This requires ongoing monitoring of the company's development and a regular adjustment of my valuation.

Management Issues

Problems in management, such as changes in leadership or scandals, could be a serious signal. If the management no longer effectively represents the interests of shareholders or if corporate governance becomes unclear, an exit might be considered.

debt and liquidity

An increase in debt, especially if not justified by the potential for future growth, could be a warning signal. Similarly, liquidity issues, such as difficulties in servicing debt, should be carefully monitored.

Shifts in Competitive Situation

Changes in the competitive environment can have a significant impact on the profitability and long-term success of a company. If new competitors enter the market or if competition intensifies, this should be carefully analysed.

reducing the basis through share repurchases or dividend payouts

The fifth reason is my personal favourite, as I don't have to part with the company at all. The basis, i.e. the capital I have invested, can be reduced through dividend payouts and share repurchases. On the one hand, dividends mean additional income for me, which influences my original investment. The basis is therefore reduced by the total dividends received. For example, if I originally invested $10,000 and receive $500 in dividends, my reduced basis is $9,500. And after a certain holding period, the capital invested is repaid to me in full.

Share repurchases also play a role. As the company repurchases its own shares, the value per remaining share increases. This also affects my basis, as there are fewer shares in circulation and I therefore have to divide the company's profits with fewer investors, or rather, I get a bigger slice of the cake.
For example, if the company has repurchased $1,000 worth of shares and the market price per share increases from $50 to $55, my reduced basis is $10,000 / $50 = 200 shares * $55 = $11,000.

Hi, I'm [Alexander Kelm]

Entrepreneur, value investor and angel investor. Founder of Wall St. Nerd. Join me here on wallstnerd.com to learn how to read financial statements, find healthy companies, and invest your money wisely.

Alexander Kelm

Investment Strategy

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