I believe that choosing investments using a value investing approach produces extraordinary results over the long term.
My philosophy is that constructing a concentrated portfolio of high-quality stocks priced at low multiples of earnings and cash flow with good balance sheets and durable competitive advantages will outperform the general market.
I believe a bottom-up investing approach produces superior results. Part of the reason is that it’s simpler. Bottom-up investing starts at the company level, analyzing a stock’s fundamentals and determining if it’s a good investment on its own, irrespective of what’s going in the larger economy or world.
While investors should be aware of factors in the global economy, investing with a top-down approach is simply too hard. There are too many interrelating variables in the world that make it impossible to consistently predict which investments are superior with a top-down approach.
Quality at a bargain price drives my investing philosophy. There are high quality companies and there are companies that are cheaply priced.
It’s rare to find high quality companies at a cheap price. Usually high-quality stocks are expensive for a reason and cheap stocks are cheap for a reason.
Charlie Munger, partner of Warren Buffet once said, “When you locate a bargain you must ask, why me God? Why am I the only one who could find this bargain?”
There’s reason to be skeptical when you find a good deal. Quality at a bargain is difficult to find. You’re competing with millions of investors. Are you really that much smarter?
At times however, markets behave irrationally and give us an opportunity to take advantage of mispricings.
When I invest in a stock, I’m taking a partial ownership position. I have to ask myself before investing, “What am I receiving for the price I paid?’ Warren Buffet famously said, “Price is what you pay. Value is what you get.” I have to be aware of what I’m receiving and why I expect the price I paid to intrinsic value gap to close, thereby making me a profit.
Investors in a stock can profit in one of three ways. Firstly, from free cash flow generated by the business resulting in dividends or a higher share price. Secondly, from an increase in the multiple of earnings that investors are willing to pay for the business. Thirdly, from a closing of the gap between stock price and intrinsic value. I expect to invest in stocks where the risk-reward ratio is high that one of the above occurs.
If investors are willing to put in the work and patience, they can find the holy grail of investments: Quality stocks at bargain prices.
Mohnish Pabrai, one of the best value investors of all time, said “You don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting.”
There needs to be a willingness for investors to wait on the sidelines until opportunity arises. There’s nothing wrong with holding cash even as the crowd is buying.
When you find stocks that have a history of high returns on capital with no red flags priced below their intrinsic value, you have an opportunity.
How do I determine what constitutes a quality stock that’s a good value?
I run stocks through several accounting screens to find any red flags such as possible financial statement manipulation or financial distress.
This eliminates all the potential danger stocks. This step would’ve eliminated Enron as a stock pick in the 2000’s!
I rank stocks based on the lowest multiples of enterprise value to their earnings before interest and taxes. These are the bargain stocks.
The next step is to sort these bargain stocks based on quality. Quality is determined by running each stock through some forensic analysis. I measure return on capital, free cash flow, profit margin, debt ratios and other measures to see which stocks have a history of consistency and high performance.
This will indicate companies that have durable competitive advantages.
I then sort the stocks based on a quality score combining the above measures. Now I have a small list of the highest quality bargain stocks to construct a portfolio from.
Detailed Technical Approach
If you’re interested in a more detailed technical approach of my investing process, click the button below. There is no hidden black box like some funds have. I believe investors should know exactly how their money is being invested.
Also see the Form ADV below which is filed with regulators and gives more details about RTN Investments, including structure of the fund, fees, methods of analysis, code of ethics, experience of the manager, Robert Nowak, and more.
I also eat my own cooking. My money is invested in this fund according to the same investment process. The stocks my investors own, I own.
- Micron Technology (MU)(16.67%)
- Canfor Corp (CFPZF)(16.67%)
- Thor Industries (THO)(16.67%)
- Advanced Energy Ind. (AEIS)(16.66%)
- Louisiana Pacific Corp. (LPX)(16.66%)
- United Therapeutics (UTHR)(16.66%)
- Current holdings as of January 3, 2019