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Investing Is Simple, But It Is Not Easy

Thursday, May 25th, 2017

When it comes to investing, we have tried to establish a simple philosophy. The basic principle is to invest in good quality companies at a fair price. While the basic principle is simple to follow, the work required over an investors life is not necessarily easy.

Quality means much more than just the name and brand. While these are still important attributes we look at, quality also refers to the strength of the company’s financials. This includes items such as a company’s profit margin, return on equity, cash flow, and balance sheet. A firm can have a great name and a great brand, but if the financials are of poor quality the business would not be worth an investment. Companies can have a recognizable brand, but if the financials are poor bankruptcy can occur and the shareholders lose their investment. We have seen examples of this time and time again with companies such as Delta Airlines, General Motors, and KB Toys to name a few. That is why at Wilsey Asset Management we spend the time every week to go over all the companies in our portfolio to ensure the financials are strong.

If the company passes the test of having a quality name and quality financials, the next piece of the equation is a fair price. Far too often investors make the judgement of a company being expensive or cheap solely based off the stock price. In reality the stock price tells you what the last person paid for the company and one cannot truly perceive any value until they analyze the company further. A stock trading at $1000/share could have a better value than a stock trading at $5/share. By comparing the stock price to other variables such as past earnings, future earnings, cash flow, and book value of a company an investor can then decipher whether the company has a low valuation and if they are receiving a fair price.

Once you can determine the accounting of the company and understand the value you are receiving, the final part of investing requires you to maintain your discipline. Going back to 1927, Value stocks have outperformed all asset classes and provided an average annualized return of 13.5%. This outperforms growth stocks at 9.2% and the S&P 500 at 9.9%. It is also important to note the catastrophic events of the great depression, World War 2, the crash of the nifty fifty, the tech boom and bust, and the financial crisis of 2008 occurred during this time period.

Using a value approach does not mean every year you can expect a return of 13.5%, but rather it is important to understand that as an investor you are going to have volatility. You are going to have periods of time where you will have underperformance to growth stocks or the index. But when it comes to investing the most important thing is to stick to your philosophy. You are not investing for 1 week, 1 month, 1 year, not even 5 years. In many cases, you are investing for 30,40, maybe even 50 years. Over that time frame you will be able to overcome volatility and during pullbacks it is even more important to understand your philosophy. When you understand the philosophy, you can take advantage of pullbacks and buy companies on sale.

While the philosophy of owning quality companies at a fair price is a simple concept, the research time and volatility can make it a hard process to follow. While it may be difficult, enduring volatility the proper way will leave you a wealthier investor over your investing career.



Do you have a question or a company you'd like us  to take a look at? Email us at Brent@WilseyAssetManagement.com or Chase@WilseyAssetManagement.com.


Brent Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8am and Sunday at 5pm on KFMB AM760.  Chase is a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8am and Sunday at 5pm on KFMB AM760 as the co-host for the Smart Investing show with his father Brent Wilsey. Information is provided by Reuters.