At Wealth Growth Investment Management, our aim is to maximise long term wealth for our clients by purchasing companies trading at the largest discount to their long term intrinsic value. In some portfolios, we combine this with a macro-economic view to protect clients wealth before recessionary periods, and ideally purchase these same strong companies near or at the bottom of recessionary downturn periods, when prices are low to generate higher returns and greater wealth for clients. In some portfolios, we look to generate wealth during these recessionary periods. We believe that clients should not have to experience panic, fear, and financial loss during recession downturns, as this is easily avoidable.
Our risk-averse investment philosophy is to calculate both the present intrinsic value of a company and the long term intrinsic value of a company and to invest in companies with the largest discount. We take a 5-10 year view and continually research companies for the largest discount as this is how we believe we will maximise profits. When constructing portfolios, we combine bottom up investing, which focuses on company aspects, with top down investing, which focuses on the macro-environment, as the combination ultimately affects share prices and will generate higher returns for clients.
In determining intrinsic value we focus our research on many factors including sector fundamentals, strength and weaknesses of company fundamentals, as well as risk factors surrounding these companies. We believe by being risk-averse and investing in strong companies with low risk factors, we will yield superior returns in the long term.
Please see below example:
We would look to purchase Company A as it has the largest discount.
We believe that in the short term the stock market reacts to many aspects including sentiments such as fear and greed, to which people such as technical and short term traders react. However, in the long term, share prices will return to true intrinsic value. As sentiment dominates the stock market in the short term, there are times when the share price of a company, with a weak intrinsic value, may outperform a company with a strong intrinsic value. When this occurs, we would rather under-perform as we feel those shares are higher than their intrinsic value and when this occurs there is a very high risk of capital loss and we are not prepared to take that risk as the short term reward is not worth the long term capital loss. When share prices normalise, the share price of the company with a weak intrinsic value will lose value and the company with a strong intrinsic value will outperform.
Please see below example for further explanation:
The graph above shows the share prices of Company C, with strong fundamentals and Company D with weak fundamentals. The vertical axis shows the share price in units, the horizontal axis shows the time in months. At inception both companies had a share price of 100 units. As time progresses from inception to month 36, Company C with strong fundamentals, outperforms Company D with weak fundamentals, then due to sentiment between month 36 to month 48 Company D outperforms Company C. However, when true value in Company C is realised, Company C outperforms Company D from month 48 to month 60. The overall outperformance from inception to month 60 in Company C is a capital gain and in Company D is a capital loss. We would rather hold Company C in the long term even though Company D outperformed Company C between month 36 to month 48 as Company C is stronger and will provide a long term capital gain – whereas Company D will provide a long term capital loss. This is why we believe a long term view is more accurate than a short term view.
In summary, a combination of protecting clients wealth before recessionary periods and purchasing strong or strengthening businesses, at low prices, especially during market downturns and recessionary periods, will generate safe, superior returns and ultimately superior wealth for our clients.