How I Invest - the Cozar Way

Given that this is a website dedicated to investments it would only be suitable to begin with the most important thing - the framework I use to analyze the merits of any opportunity. Most investors have one and typically they tend to stick to it for better or worse, for richer or for poorer.

As you will note from browsing through this website, there will be numerous references to value-investing, a term that has grown to be more and more abstract as time passed and as more and more people started adopting it in an effort to emulate Warren Buffet’s style while putting their own spin on it. This is by no means accidental and I am the first to plead guilty of being part of that crowd.

At the very core, this particular framework appeals to me because it is deeply rooted in logic, reason and virtue. In a nutshell for those unfamiliar with the concept, value investment seeks to invest in undervalued opportunities, regardless of the form ( stocks, bonds, real estate, private equity, alternative investments, etc.). Akin to searching for bargains when shopping for clothes, groceries or any other thing, value investors seek something that has an “intrinsic value” higher than the price paid. They want to pay $50 (or less) for something which they believe is worth $100.

Determining the intrinsic value of an investment is most of the time an arduous, draining and lonely exercise but this is ultimately how an investor earns his money - at the time of purchase, not at the time of selling. As Sun Tzu famously once put it: “Every battle is won before it is ever fought”. In the context of investing, finding the rare pearl requires discipline, a clear mind, and the right balance between greed, for lack of a better word, and fear. Of course knowledge of accounting, business strategy and various financial concepts come into play as they enhance the array of tools in the investors belt.

So what do I search for when seeking to deploy my hard earned money?

Companies with a deep “Economic moat”

Another concept championed by Buffett, an “economic moat” refers to a lasting competitive advantage. This can take multiple shapes such as being the low cost provider, having a technological lead, natural monopoly, network effects, etc. The goal here is to ascertain that the long term prospects of the company are sound and that the odds of a competitor swooping in and easily displacing our chosen vehicle are very remote.

Consistent cash generators

I seek companies that are capable of producing great cash returns year in and year out. I love it when they return some of their profits to their shareholders in the form of dividends or better yet share buy backs, but love it even more if the company has sufficient runway to use the generated returns to reinvest the proceeds back in the business. This turns them from simple cash generators into genuine compounding machines.

Business models I can understand

All of the above sounds great, doesn’t it? I believe now would be a good point to introduce one of the principal pillars upon which the whole strategy stands. In order to have a satisfactory assessment of the points above, an investor needs to be intimately familiar with the business strategy of the company and be able to explain it to anyone, even if awoken at 3 AM, in a concise, simple fashion - typically in no more words than allowed in a tweet.

Aversion to debt

This is one of the trickier aspects to be considered by any investors and getting the right balance between too much and too little is extremely important. Debt or leverage as it is commonly referred to, is a great amplifier of returns and can have highly beneficial effects when used in the right measure. Depending on the industry, it can be a necessity and in some cases it is quintessentially part of the business model (think banks, insurance, etc.). With debt, like with many things in life, there is a sweet spot between two extremes and the key is to ensure the company’s business model is in harmony with the debt practices employed. Notwithstanding the foregoing, it is always preferable to err on the side of caution and have significantly less debt than the implied carrying capacity.

Incidentally, this principle carries over into the portfolio management techniques I employ

Long-term focus

Being a long-term investor, I search for companies who share this vision and have a business model that has the ability to create a lasting positive impact, on the economies in which they take part, on their employees, on society and on the environment. This is always analyzed within a context with great attention not to discriminate against great businesses with excellent attributes in order to satisfy dogmatic imperatives.

Honest & able management

This is also a tricky aspect. In short, I search for talented management that are maniacally focused to do right by their clients, employees and shareholders. Character, integrity and intelligence are crucial. This is perhaps one of the most difficult elements to assess as there is no standard measure and the generally accepted accounting principles fail to capture this dynamic, except for one aspect: compensation. I believe in pay for performance and that talent should be rewarded.

I interrupt this to give a shout out to my boss. If you are reading this, and you know who you are, hoping you catch my little innuendo.

At this point my boss can stop reading as I am about to douse the flames by qualifying the above a little further. Compensation is a very important aspect of any leadership team and beyond. It needs to be fair but not exaggerate and needs to incentivise the right behaviour or it can prove to be fatal.

X-Factor

This is a somewhat newer point in my investing framework but becoming increasingly predominant and many a time having veto power over all the other elements. What it is exactly is hard to explain. The French would understand it through the use of the expression “je ne sais quoi”. It is that element of panache, of humanity, of strength and vulnerability mixed into one. In the context of stocks, it is the soul of the company. Something that cannot be reasoned. It can only be felt. The stronger it is, the better. It’s what makes the company tick at it’s very core, the seed that started it all and permeates throughout it’s inner workings and beyond.

Reasonable price

This is ultimately the point where hearts are broken. All the research, all the efforts and all the excitement of having found “the one” can get crushed if it does not pass this test. A great company or investment opportunity can easily turn into a very lousy opportunity if the price paid for it is too high. This is why I favour a bottom-up approach in my search efforts, ensuring that my search takes place in a pool of candidates which most likely will have passed the valuation test. In many ways this is a quantitative measure at heart and perhaps one of the simplest items from the checklist above. It is by no means the easiest and it should not be underestimated. When all else fails, it is the price one pays that provides a margin of safety and serves as a safeguard against mistakes. Nevertheless, value can take many shapes and one needs creativity and imagination to sometimes see the “invisible”.

I have said that Investing is the ultimate liberal art. As you will see going forward, should you choose to continue visiting my site, my analysis of companies, macro conditions and business in general will draw on many disciplines: history, psychology, biology, science, technology, philosophy and on the odd occasion... mysticism. While the body of knowledge necessary to perform in today’s markets is ever expanding, there are a few timeless principles that will find application across the ages. These are mine. They are not to be construed as a “get-rich-quick” recipe but rather as the underlying tenets of a craft, which need to be honed, perfected and adapted as both the investor and the environment evolve. I hope this will have been enlightening and look forward to sharing with you these principles at work in the coming posts, along with some other nuggets of wisdom.

Alex