Value Investing – How we achieve outperformance

2020 | Digital asset management

We are value investors with passion. For years, our portfolio managers have relied on the value-oriented strategy, and with excellent results.

As the only digital asset manager to offer this strategy, we are committed to making the basic principles of value investing understandable and comprehensible to you.

How does Value Investing work?

The goal of this proven investment strategy is to identify undervalued stocks and to hold them for the long term. The roots of value investing go back to the year 1928. However, this strategy is by no means outdated, but rather more up-to-date than ever in our fast-moving times.

Every company that is traded on the stock exchange has a price and a value. The price is relatively easy to determine – it is the current share price determined by supply and demand.

On the other hand, the value of a company is much more difficult to determine and depends on many different factors. On the one hand, it is determined from hard facts, which are usually based on key figures such as cash flow, the price-earnings ratio and many others. On the other hand, soft factors that cannot be determined from figures have an influence on the value of a company. These include, for example, the quality of the business model, the management or even competitive advantages.

Our analysts therefore spend a large part of their time getting to know potential companies in detail and analysing them down to the smallest detail in order to subsequently determine the most accurate “value” possible.

If price and value are known, the two are compared: If the price is currently lower than the value, an investment makes sense because we assume that the price will adjust to the actual value in the long term.  

This difference between value and price (assuming that the value is higher than the price) is called the “safety margin” in value investing. The greater this difference, the greater this safety margin.

Value investing is a sophisticated method of investing based on the most careful research and analysis.

Why we rely on our human analysts and portfolio managers for the analysis and selection of individual securities can be read in our article “Artificial Intelligence in Asset Management”.

What returns are possible with value investing?

ETFs, index funds and most Robo Advisor follow a passive investment approach, i.e. they simply track an index. For this reason, the returns on these investments can never be better than the returns on the index. In fact, because the cost of the investment itself is added to the cost of the investment, the returns are even lower. Please also read our article “The underestimated risk of ETFs and passive investing”.

Value investors, on the other hand, do not orient themselves to any index. For a value investor, this opens up a much broader field of possible investments. At the same time, however, a value investor’s philosophy and approach also limits himself very much in terms of the companies that are actually shortlisted and then find their way into the portfolio.

As value investors, we are not tied to an index, so we are free to decide which stocks to buy or sell at any time – even in the event of an unfavorable development of a company. ETFs and Robo Advisor (due to their index-linked investment model) have no choice but to stick to companies that perform poorly or whose business models no longer have any future prospects, but remain invested because they are “still” large enough and are therefore included in an index.  

Outperformance from Value Investoren

Outperformance von Value Investoren, Quelle: eigene Darstellung basierend auf: The Superinvestors of Graham and Doddsville, Buch: Überrenditen: Eine vergleichende Studie über die Methoden der größten Investoren der Welt, www.gurufocus.com, & other

As value investors, we are not tied to an index, so we are free to decide which stocks to buy or sell at any time – even in the event of an unfavorable development of a company. ETFs and Robo Advisor (due to their index-linked investment model) have no choice but to stick to companies that perform poorly or whose business models no longer have any future prospects, but remain invested because they are “still” large enough and are therefore included in an index.  .  

Why does not every fund manager pursue a value investing strategy?

In addition to a lot of experience and the necessary analytical skills, value investing requires courage and patience. Courage to not simply hide behind a stock index, but to deviate from it. Patience because an approximation between actual value and current price takes time and does not happen overnight.

According to a study by SPIVA (https://us.spindices.com/spiva/#/), 95% of active fund managers fail to beat the benchmark. This is why most fund managers cling to an index so as not to have to justify why they have been worse.

Warren Buffett has said: “Broad diversification is only necessary if an investor does not know what he is doing”.

What are our value investing principles?

The most important characteristic of a successful investor is the ability to think and make rational decisions. We are therefore rational and objective. Reason is the best antidote to emotional errors. We avoid mistakes by thinking through and analysing possible investments step by step in a structured process.

Think like an owner, because you are one – a share is a participation in a company

As a shareholder you are co-owner of a real company. Imagine you are co-owner of a real estate – would you look at its price daily, maybe even hourly?

A long-term mindset is not only the key to a successful investment, it also saves you a lot of nerves and lets you sleep more peacefully at night.

Pay less than you get in return

Warren Buffett puts it best: “The price is what you pay. Value is what you get.” In our daily lives, we often follow this rule – we buy at special offers or sell out at lower prices.

However, when prices fall in the stock market, most (inexperienced) investors leave it alone. But for us value investors this is perfect, because we like to buy shares of excellent companies at discounted prices!

Think long-term – in years or decades, not weeks or months

We do not buy shares in order to speculate on a positive development in the short term, but rather to invest in companies we are convinced of in the long term. We invest in their business models, management, competitive advantages, employees and much more, which makes these companies particularly excellent.

If we expect a positive long-term development of the individual companies, short-term price changes are meaningless for us. Unless we have the opportunity to increase our investment by a price slide at an even more attractive price or to sell for a lot of money by an exaggerated price increase.

Act in the opposite direction – we use short-term developments on the capital market to our advantage and do not get carried away.

We use market fluctuations to the advantage of our customers. The market is made up of many people, with different emotions and expectations that guide them. In a depressive phase, a “bear market”, market participants often underestimate the value of a company. It is the task of the wise investor to recognize such cases and take advantage of the emotional fluctuations of the market to buy the company shares at a price that is below their actual value.

However, it is also possible that the market and its participants are too euphoric and pay too high prices for company shares – in this phase we as value investors are on the seller’s side.

Avoid mistakes

The most important characteristic of a successful investor is the ability to think and make rational decisions. Reason is the best antidote to emotional errors.

Buy only what you really want – invest with focus

We would never buy or replicate an index because we would buy shares of companies that are overindebted, overpriced or simply unattractive. In order to invest successfully, you cannot swim with the masses, you have to break out of the crowd.

If I like an apartment or a house, I don’t buy the whole block of flats or houses. Nor do I buy an apartment that is the average of all the apartments I have built. I buy exactly what I like and what I want for a long time.

Good investment opportunities don’t exist like a dime a dozen – and our detailed analyses take time. Our portfolios consist of 15 to 25 individual securities.

Management of the company

We are convinced of the enormous added value that outstanding managers can generate. This is why we also attach great importance to high management participation and sensible incentive systems. They motivate them to make the best possible decisions in the interests of the company and thus for us and our clients.

In addition to remuneration and shareholdings, we are interested in the history, including the successes and failures of the managers. In which areas they have already proven themselves and what their career path up to their current leadership role looks like. We examine how past forecasts and strategies developed and how meaningful they were for shareholders. It is also important to us how the managers handle the available capital. A CEO has innumerable possibilities for the use of capital.

Managers who make excellent capital decisions tend to remain excellent. Their decisions are not normally distributed – that is, they make good decisions more often than their competitors because they are actually better.

Only buy what you really understand – do not overestimate yourself.

Nobody is perfect, nobody knows everything, nobody can do everything – not even us.

That’s why we only operate within our area of competence of value-oriented investing. And in this area too, we only invest in companies that we really understand and whose future prospects we can assess.

We are value investors with passion. For years, our portfolio managers have relied on the value-oriented strategy, and with excellent results.

As the only digital asset manager to offer this strategy, we are committed to making the basic principles of value investing understandable and comprehensible to you.

How does Value Investing work?

The goal of this proven investment strategy is to identify undervalued stocks and to hold them for the long term. The roots of value investing go back to the year 1928. However, this strategy is by no means outdated, but rather more up-to-date than ever in our fast-moving times.

Every company that is traded on the stock exchange has a price and a value. The price is relatively easy to determine – it is the current share price determined by supply and demand.

On the other hand, the value of a company is much more difficult to determine and depends on many different factors. On the one hand, it is determined from hard facts, which are usually based on key figures such as cash flow, the price-earnings ratio and many others. On the other hand, soft factors that cannot be determined from figures have an influence on the value of a company. These include, for example, the quality of the business model, the management or even competitive advantages.

Our analysts therefore spend a large part of their time getting to know potential companies in detail and analysing them down to the smallest detail in order to subsequently determine the most accurate “value” possible.

If price and value are known, the two are compared: If the price is currently lower than the value, an investment makes sense because we assume that the price will adjust to the actual value in the long term.  

This difference between value and price (assuming that the value is higher than the price) is called the “safety margin” in value investing. The greater this difference, the greater this safety margin.

Value investing is a sophisticated method of investing based on the most careful research and analysis.

Why we rely on our human analysts and portfolio managers for the analysis and selection of individual securities can be read in our article “Artificial Intelligence in Asset Management”.

What returns are possible with value investing?

ETFs, index funds and most Robo Advisor follow a passive investment approach, i.e. they simply track an index. For this reason, the returns on these investments can never be better than the returns on the index. In fact, because the cost of the investment itself is added to the cost of the investment, the returns are even lower. Please also read our article “The underestimated risk of ETFs and passive investing”.

Value investors, on the other hand, do not orient themselves to any index. For a value investor, this opens up a much broader field of possible investments. At the same time, however, a value investor’s philosophy and approach also limits himself very much in terms of the companies that are actually shortlisted and then find their way into the portfolio.

As value investors, we are not tied to an index, so we are free to decide which stocks to buy or sell at any time – even in the event of an unfavorable development of a company. ETFs and Robo Advisor (due to their index-linked investment model) have no choice but to stick to companies that perform poorly or whose business models no longer have any future prospects, but remain invested because they are “still” large enough and are therefore included in an index.  

Outperformance from Value Investoren

Outperformance von Value Investoren, Quelle: eigene Darstellung basierend auf: The Superinvestors of Graham and Doddsville, Buch: Überrenditen: Eine vergleichende Studie über die Methoden der größten Investoren der Welt, www.gurufocus.com, & other

As value investors, we are not tied to an index, so we are free to decide which stocks to buy or sell at any time – even in the event of an unfavorable development of a company. ETFs and Robo Advisor (due to their index-linked investment model) have no choice but to stick to companies that perform poorly or whose business models no longer have any future prospects, but remain invested because they are “still” large enough and are therefore included in an index.  

Why does not every fund manager pursue a value investing strategy?

In addition to a lot of experience and the necessary analytical skills, value investing requires courage and patience. Courage to not simply hide behind a stock index, but to deviate from it. Patience because an approximation between actual value and current price takes time and does not happen overnight.

According to a study by SPIVA (https://us.spindices.com/spiva/#/), 95% of active fund managers fail to beat the benchmark. This is why most fund managers cling to an index so as not to have to justify why they have been worse.

Warren Buffett has said: “Broad diversification is only necessary if an investor does not know what he is doing”.

What are our value investing principles?

The most important characteristic of a successful investor is the ability to think and make rational decisions. We are therefore rational and objective. Reason is the best antidote to emotional errors. We avoid mistakes by thinking through and analysing possible investments step by step in a structured process.

Think like an owner, because you are one – a share is a participation in a company

As a shareholder you are co-owner of a real company. Imagine you are co-owner of a real estate – would you look at its price daily, maybe even hourly?

A long-term mindset is not only the key to a successful investment, it also saves you a lot of nerves and lets you sleep more peacefully at night.

Pay less than you get in return

Warren Buffett puts it best: “The price is what you pay. Value is what you get.” In our daily lives, we often follow this rule – we buy at special offers or sell out at lower prices.

However, when prices fall in the stock market, most (inexperienced) investors leave it alone. But for us value investors this is perfect, because we like to buy shares of excellent companies at discounted prices!

Think long-term – in years or decades, not weeks or months

We do not buy shares in order to speculate on a positive development in the short term, but rather to invest in companies we are convinced of in the long term. We invest in their business models, management, competitive advantages, employees and much more, which makes these companies particularly excellent.

If we expect a positive long-term development of the individual companies, short-term price changes are meaningless for us. Unless we have the opportunity to increase our investment by a price slide at an even more attractive price or to sell for a lot of money by an exaggerated price increase.

Act in the opposite direction – we use short-term developments on the capital market to our advantage and do not get carried away.

We use market fluctuations to the advantage of our customers. The market is made up of many people, with different emotions and expectations that guide them. In a depressive phase, a “bear market”, market participants often underestimate the value of a company. It is the task of the wise investor to recognize such cases and take advantage of the emotional fluctuations of the market to buy the company shares at a price that is below their actual value.

However, it is also possible that the market and its participants are too euphoric and pay too high prices for company shares – in this phase we as value investors are on the seller’s side.

Avoid mistakes

The most important characteristic of a successful investor is the ability to think and make rational decisions. Reason is the best antidote to emotional errors.

Buy only what you really want – invest with focus

We would never buy or replicate an index because we would buy shares of companies that are overindebted, overpriced or simply unattractive. In order to invest successfully, you cannot swim with the masses, you have to break out of the crowd.

If I like an apartment or a house, I don’t buy the whole block of flats or houses. Nor do I buy an apartment that is the average of all the apartments I have built. I buy exactly what I like and what I want for a long time.

Good investment opportunities don’t exist like a dime a dozen – and our detailed analyses take time. Our portfolios consist of 15 to 25 individual securities.

Management of the company

We are convinced of the enormous added value that outstanding managers can generate. This is why we also attach great importance to high management participation and sensible incentive systems. They motivate them to make the best possible decisions in the interests of the company and thus for us and our clients.

In addition to remuneration and shareholdings, we are interested in the history, including the successes and failures of the managers. In which areas they have already proven themselves and what their career path up to their current leadership role looks like. We examine how past forecasts and strategies developed and how meaningful they were for shareholders. It is also important to us how the managers handle the available capital. A CEO has innumerable possibilities for the use of capital.

Managers who make excellent capital decisions tend to remain excellent. Their decisions are not normally distributed – that is, they make good decisions more often than their competitors because they are actually better.

Only buy what you really understand – do not overestimate yourself.

Nobody is perfect, nobody knows everything, nobody can do everything – not even us.

That’s why we only operate within our area of competence of value-oriented investing. And in this area too, we only invest in companies that we really understand and whose future prospects we can assess.

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