When it comes to value investing, there are two simple rules.
Rule 1: Never lose money. Rule 2: Never forget rule number one.
Popularised by billionaire investor Warren Buffet in the 1950s, the term ‘value investing’ refers to a long-term investment strategy whereby investors seek to buy quality businesses when their share prices are below their ‘intrinsic value.’ But what exactly does this mean? And how does value investing differ to alternative approaches to investing?
“Value investing presents a straightforward way to apply proven investment principles, spot great deals and produce extraordinary returns,” explains Matthew Smith, Founder and CEO of local investment management and corporate advisory firm, Menninger Capital.
“There is more than one way to determine the value of a company. For instance, markets let you know what other people are willing to pay for a company’s shares. However, value investors will make their decision to buy (or sell) based on their estimate of intrinsic value versus the market price.
“Intrinsic value measures the value of a company based on its assets and cash flows and provides a deeper, more informed insight into a company’s value. Intrinsic value is also estimated by analysing a company’s fundamentals to determine its true worth.
“As a result, this investment strategy isn’t dictated or bound by market conditions like other investment strategies, meaning we have generated decent returns for our Investment Partners during rising markets and even better returns during falling markets.”
Having celebrated 10 years in business last October, Menninger Capital, manages exclusive global investment funds for private groups of Investment Partners. Over these 10 years Menninger has become one of Australia’s leading investment managers based on its investment returns.
The company’s flagship global growth fund, Marathon, aims to achieve long-term capital growth by investing primarily in quality companies, which Matthew remarks provides investors (who he refers to as Investment Partners) with access to the company’s unique value investing approach.
“There is no way you should invest in a company unless you understand that company inside out. This is one of the core principles of value investing,” he continues.
“Within Marathon, there are an array of companies we invest in, we understand them completely and they are heavily aligned with our core values.
“Our broad investment mandates allow us to invest in all asset classes and geographies. We get to uncover the very best investment opportunities for our Investment Partners.
“ At Menninger, we invest alongside our Investment Partners and we live by the philosophy that we eat our own cooking, meaning we only recommend investments that we invest in too.”
Whilst value investing has a reputation for being a ‘safer’ option, Matthew reiterates the importance of engaging with Investment Partners who have a thorough understanding of the principles associated with value investing.
“Value investing is considered less risky because you’re focused on investing when there’s a margin of safety, which is the difference between the intrinsic value and the price you’re paying for a company. You’re also focused on the long-term goal of consistently creating wealth over a prolonged period of time,” says Matthew.
“There is a lower risk of losing your initial investment compared to other types of investment strategies. However, in saying this, it is crucial to work with experts who are experienced in determining a company’s intrinsic value.”
In addition to their distinctive value investment approach, Menninger Capital is also known for their unique service offerings in the corporate advisory space, focusing largely on the merger and acquisition of companies.
“We have advised on over A$350 million of corporate transactions and are driven by our passion to be a partner of world-class businesses and our corporate advisory capabilities complement our investment management activities,” adds Matthew.
“As such, we seek long-term client relationships and often take a seat on our corporate clients’ advisory boards to contribute further to the strategic vision and growth of their business.
“As a partner, we can employ corporate advice skills and have influence over the direction of the business. We aim to support management teams and boards in creating long-lasting shareholder value and ensure business success for years to come.”
The information contained in this article is intended to be general in nature and is not personal financial product advice.
Main image: Lloyd Hirst, Daniel Ryder, Matthew Smith, Declan Rush, Andrew Robinson, Tomas McMahon, and Chris Rockemer.
Image credit: Rosana Kersh Photography
Click here to view images from Menninger Capital’s 10th anniversary.
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