Value investing in promising quality shares
When it comes to selecting shares, Genève Invest has been specialising in “value investing”. This investment concept can be traced back to the investment guru Benjamin Graham. The basic idea is simple: companies have an intrinsic (real) value which can be determined quite accurately using a range of corporate data. However, due to overreactions recurring on a cyclical basis, the stock market value of the company can be very different from the intrinsic value. Nonetheless, in the long term the stock market value and the intrinsic value always converge. As traditional value investors we make use of this and conduct targeted investments in undervalued shares with “catch-up” potential. In addition to their favourable undervaluation, the companies we are particularly interested in have other characteristics, which, although this does not mean that the share price is completely resistant to setbacks, offer a certain amount of protection. These other characteristics include in particular:
Permanent competitive advantages
An important factor in a company’s success is the competitive advantage over competitors. Companies that succeed in maintaining this over a long period of time are in a position to achieve above-average returns. They include, for example, companies with long-term patents and licenses such as the American bio-pharmaceutical company Gilead Science, the scientifically and economically dominant player in the area of medicines used to combat hepatitis C. Companies whose customers are exposed to high exchange costs also fall into this category (e.g. SAP). A third example worth providing is what is known as the network effect, best illustrated by Microsoft. Although there are diverse providers who offer their text processing and spreadsheet programs free of charge, complete compatibility with other users is only provided by Microsoft products at a price.
An additional factor contributing to increasing yields is growth in turnover. In stagnating or even shrinking branches this can only be achieved by the very cost-intensive gaining of market share. For companies operating in growth branches there is almost always “automatically” corresponding increases. We see good potential in, for example, the consumer goods branch. In many countries in Africa, Asia and South America, large sections of the population will in the next twenty years move up from utter poverty into the middle class. These people want to have a share in global consumption. In developed countries, in contrast, the importance of the health sector will grow continuously.
A third value driver is technical progress. The typical example is the internet. Companies that are well positioned in this branch, such as Google, will in the future disproportionately profit from the situation thanks to increasing numbers of users.
Stable cash flows from continuous dividend payments
Share companies that fall into one or even several of the aforementioned categories are as a rule characterised by attractive, above-average dividends with strong growth. These ensure a steadily increasing cash flow for the investor, but also in turn represent a certain degree of security against (sharply) falling share prices.
It is noticeable again and again that private investors act in a pro-cyclical manner with regard to their share investments and would like to invest just when shares have been rising over a long period of time. However, if there are setbacks or long weak phases, their interest quickly dissipates. Genève Invest operates on the capital markets on the basis of well-founded market, branch and corporate analyses, and uses technical indicators to determine suitable times at which to invest or withdraw. In contrast, emotional factors have no influence on our investment decisions.