At the risk of sounding like a correctional facility publication, I thought it was fitting to title the newsletter Conviction & Discipline because those two concepts best represent the philosophy at Perpetual Value Asset Management.
Though I have often written about the quantitative process of our investment strategy, such as the stock selection process, and which ratios I look at to determine a quality company, I have rarely touched upon the qualitative aspects of the investment and asset allocation process. Success in the asset management business generally comes more from qualitative decisions than mathematical calculations.
Day in and day out I am constantly repeating to myself the two words – conviction and discipline. The reason for this is simple, when things get bad (and they always do in this business), I need to have the conviction to believe in my research and I need to have the discipline to stick to the investment process and thesis.
As limited partners you agreed to a specific investment discipline. As the general partner, I have years of experience executing and researching our discipline and investment process – I know it works and I know it produces solid returns. Though as we all witnessed in 1999 and 2000 investors often lose focus, they become fearful or greedy and their discipline is tossed out. They begin to chase ‘hot’ trends. The excuse is usually that more money can be earned doing it the ‘new’ way versus the ‘old’ way – that somehow things are different this time.
I can assure you that when it comes to valuing an asset, our disciplined process will remain a constant. It is the process our partners signed on for in joining the fund, and it is the basis of investing as opposed to speculating. Without discipline the fund would be called the Perpetual Value Speculation Fund because we would be speculating. In life people pride themselves on being loyal, be loyal to your investment discipline, don’t stray.
Over the past few months our discipline has limited our ability to invest. Compelling values for quality companies have been hard to find. While, we have managed to locate a few, excessive prices for mediocre companies are abound. This does not mean the broad markets will crash, or that stocks in general will not continue to advance, it only means that Perpetual Value will have to work harder to find values.
Conviction is just as important as having discipline. Believe it or not, having conviction is the hardest part of my job. Perpetual Value employs such a unique strategy that when I do get a ‘buy’ signal on a company it is usually in the midst of a sell-off or some other point of weakness. Think about what that means.
When a stock sells-off, Wall Street and the media generally do not have nice things to say about it. There is a feeling of safety in numbers, thus if you are among the minority who like the company, it can feel as if you are missing something. Most portfolio managers cannot handle such negativity; your manager will strive to maintain the discipline of our proven process.
There have been times this year where I had opportunities to make some great buys; often I seized that opportunity, but occasionally I let it slip away. Even Ted Williams did not bat 1.000. Missed opportunities are a fact of this business. It is important to understand what happens psychologically during the portfolio management process so you do not repeat the same mistakes over and over again. Your conviction will be tested, be prepared.
No matter what type of investing you are doing, if you ever question your investment strategy or analysis, and in the near-term things go against you, you should think about conviction and discipline
This analysis and research are for discussion purposes only and has been prepared solely as the opinion of the author and Perpetual Value International Ltd and Perpetual Value International Advisers Pte Ltd. This article shall not constitute an offer to sell, or the solicitation of any offer to buy, which may only be made at the time a qualified investor receives a confidential private offering memorandum (the “Memorandum”) and a Limited Partnership Agreement (the “Partnership Agreement” and together with the Memorandum, the “Fund Documents”) describing the Fund. In the event of any inconsistency between this writing and the Fund Documents, the Fund Documents will govern. This presentation is provided for informational purposes only and any mention of a particular security shall not constitute a recommendation to buy, sell or hold that particular security. The investments selected in this presentation are for illustration purposes only, and are included solely to demonstrate the Fund’s intended investment strategy. There can be no assurance that the success of these investments will be achieved by the Fund, nor are the sample investments fully representative of the type of investments the Fund intends to make. Furthermore, to the extent any of the information may be deemed “investment advice”, such advice is impersonal in nature and has not been tailored to the specific investment needs of any person. An investment in the Fund will involve significant risks, including the risk of loss of the amount invested. In addition, based on traditional measures of risk, the Fund’s concentrated portfolio may incur higher volatility. Due to this, the fund may not be suitable for short-term investors. Prior performance is no guarantee of future results