In times of low interest rates and unclear stock market prospects, the question of the optimal investment strategy arises. It should be low-risk, proven over the long term and at the same time highly profitable. The strategy of one man has been considered ideal for stock market traders for decades: Warren Buffett. And not for nothing, because the Texan, born in 1930, not only made it one of the richest people in the world with private assets of around 100 billion US dollars, but also brought fortunes to many investors. Since he took the helm at Berkshire Hathaway in the 1960s and turned the former textile mill into a private equity company, its share price has risen by around 20% per year on average. In the last 30 years alone, the value of a share certificate (ISIN US0846701086) has risen from around 6,000 US dollars to well over 400,000 US dollars.
This performance is not based on luck or coincidence. Rather, it is the result of the consistent application of value investing strategy. This is a systematic investment strategy based on fundamental criteria, based on the principles of outstanding investors, including Buffett’s mentor Benjamin Graham and fund manager Peter Lynch. The central idea of value investing is very simple: Namely, to understand the share in its most original function, not as a short-term object of speculation, but as a certified share in a company whose capital and growth you can participate in the long term.
Value Investing: How to Identify Value Companies
Slightly simplified, the investment process of stock market champion Warren Buffett can be reduced to four key questions that need to be answered when looking for suitable companies:
- Is the company in excellent economic condition?
- Does the company own one? competitive positionwhich will also enable positive development in the future?
- Will the company of sincere managers who act like owners?
- Can the company’s stock be bought at a price that well below the intrinsic value lies?
The more of these criteria are met, the more likely it is that above-average investment results can be achieved. In addition, however, special situations can also be lucrative in which individual criteria are particularly well met, for example in the case of substance speculation or heavily undervalued turnaround candidates. Let’s take a closer look at the four value criteria:
Excellent economic condition
First, get an idea of the economic condition of your candidate. The company should be profitable and, if possible, have increased its sales and profits over a longer period of time. In order to be able to survive a possible period of weakness – and it will certainly come – should the company be in a solid financial positioni.e. little or no debt at all and have sufficient liquid funds.
Superior competitive position
After examining the current economic condition, the question arises as to whether and how this condition can be maintained and further improved in the future. A first indication of a strong competitive position is certainly one already successful business development for many years. But looking back alone is not enough. It should also be apparent that the company still has room to grow further. The prerequisite for this is, on the one hand, that demand can be further increased and production or sales can be expanded without any problems, and on the other hand that the company has such a dominant market position that the competition cannot do too much to prevent the expansion.
Sincere and owner-oriented management
As an owner, what can you expect from the board of directors of your company? On the one hand, you are entitled to the company reports in detail and honestly about the current situation of the company. On the other hand, that future decisions will be made in your well-understood interest. The former sounds self-evident, but unfortunately it is not. For various reasons, board members are often tempted to paint an overly positive picture of the business situation. You can recognize this, for example, in an aggressive balance sheet policy, overly optimistic planning figures or in whitewashed statements in ad hoc announcements and annual reports.
However, the central benchmark for the ownership orientation of management is the efficient use of shareholder capital. This applies in particular to investment and acquisition decisions. Sales or market share growth alone is not enough as a target. Even the profits and increases in profits are always seen in relation to the invested capital. An owner-oriented management will return every euro of capital that it can no longer earn with a return above the market average to the owners by means of dividends or share buybacks.
Price below intrinsic value
The evaluation question is certainly the crucial question. After all, what use is the best company if it cannot be bought at an acceptable price? The only question is how to correctly determine the intrinsic value of a company. A theoretically sound method is the so-called earning value, in which a company’s future profits are estimated and then discounted to the present using the interest rate of a comparable alternative investment. In connection with static key figures such as P/E, P/S and dividend yield, a meaningful picture of the valuation level of a company can usually be obtained.
More important than the valuation model used, however, is the careful assessment of sales and profit forecasts. And that brings us, last but not least, to what is probably the most important valuation principle for value investors, the “concept of the safety margin”. It says that you shouldn’t even let it matter whether your own estimates are really accurate, but rather leave enough leeway for estimation errors in the assessment in order to protect yourself against price declines. Because only those who receive their capital first can later make profits with it again. Or as Warren Buffett puts it: “There are two rules to investing. Number one: don’t lose money, and number two: don’t forget rule number one.”
An index for value investing
For investors who want to take advantage of the value strategy, which has been successful for many years, there has also been an interesting stock market index in Germany for several years: the Value Stars Germany Index. Launched in December 2013, the index tracks the performance of 20 to 30 German companies that were selected based on value companies. The index primarily contains small caps with a market value of EUR 10 to 500 million.
The team of analysts decides on the composition of this value index investor letter. An experienced team of advisors who have felt committed to the principles of the old master for many years. And with impressive success, because it is managed according to value criteria Sample account of the letter to investors has achieved a performance of 2,789% since 1999, this corresponds to an annual return of around 15.7% (Status: 06/30/2022).
The strategy of Value Stars Germany Index went up so far. Since it was launched on December 23, 2013, the index has increased by 173.3% (as of June 30, 2022). For comparison: the DAX only gained 35.5% in the same period. Other indices such as the Dow Jones or Euro Stoxx 50 were also clearly outperformed by the analysts’ selection of value stars.
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Legal Notice:
This text is only intended for investors with permanent residence in Germany. It is for informational purposes only and does not constitute an offer, advice, recommendation or solicitation to buy or sell the certificate presented. Naturally, the opportunities mentioned above are offset by risks, in particular the default risk of the issuer and the price risk of the certificate in the event of a negative development of the stocks included in the index. In addition, neither the historical yields of the certificate nor the sample portfolio of the letter to investors represent a guarantee for future yields.
It is strongly recommended that investors seek the advice of a qualified financial adviser before investing. An investment decision should only be made on the basis of the information and in particular the risk information in the prospectus documents of Lang & Schwarz Aktiengesellschaft (Final Terms, base prospectus and supplements at www.ls-tc.de).
finanzen.net GmbH maintains business connections with the investor brief Research GmbH, the advisor of the reference portfolio, and participates in the income from the management fee and the performance-related fee of the endless certificate on the Value Stars Germany Index (WKN LS8VSD).
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