My Investment Philosophy

Note: This is a living document, so it will be updated as and when necessary.

Purpose of Portfolio

We adopt a long-only, long-term investment approach with the objective of generating absolute returns of at least 15% per annum on a portfolio basis by focusing on high-quality companies.

The capital generated will be used for necessary expenses in the future and for retirement.

Expectations

Though the average stock market return is 9% per year, we are confident of achieving a portfolio return of over 15% as we have achieved that in the past, despite making lots of mistakes with massive losses since starting my investing journey in 2009.

I believe the lessons learnt over the past 12 years (and counting) will help generate sustainable investment returns for the long run.

Time Horizon

Since we intend this portfolio to last the rest of our lives, our investment horizon is over 50 years.

How our investments behave in the days, weeks and months to come matters much less than how we behave as investors in the decades to come.  

Portfolio Construction

While we have a global outlook, our portfolio is currently focused on the US- and Singapore-listed stocks.

Our portfolio will hold at least 20 stocks diversified over different industries and stages of companies.

We do not limit any stock from becoming too high a percentage of our portfolio for now. We like to let our winners run… high.

Our largest position is now 15% of our overall portfolio with an initial value of just 2.5% of the portfolio. The company earned its right to become where it is now due to strong business execution.

We tend to keep our cash position around 10% of our overall portfolio as cash earns next to nothing. We rather put the money to work in the stock market.

When we are starting out a position, we cap it to below 2% of our overall portfolio and we add slowly as we gain more confidence with the company over time.

We aim to add more money into our portfolio, starting with the higher conviction stocks, each month so as to be disciplined in our investing approach.

How We Pick Stocks

We focus on studying businesses listed globally that can grow at high rates of return.

Such companies are typically industry leaders with defensible competitive advantages, resulting in strong unit economics and attractive free cash flow generation.

Solid business growth translates to a strong appreciation in stock price over a multi-year investment horizon.

Here’s a snapshot of how we pick stocks with an unwavering focus on the business:

  • Company must be within our circle of competence and we must understand how the company makes money
  • Business must have pricing power (with a wide moat)
  • Business must have recurring revenue or any form of recurring nature (recurring behaviour by customers, etc)
  • Revenue increasing at least 20% to 30% per annum
  • Business must have operating leverage (if business is not profitable yet, it must have a path to profitability)
  • High gross and net profit margins of over 40% and 20% respectively (both growing)
  • Healthy balance sheet (more cash than debt)
  • Growing free cash flow that can be reinvested into the business
  • High return on equity of over 15% and growing
  • Relentless customer focus
  • Healthy company culture
  • Honest and competent (ideally founder-led) management with high insider ownership and whose compensation is sensible
  • Management with great capital allocation (preferably buying back shares at below intrinsic value)
  • Presence of growth catalyst
    • Huge and growing total addressable market (TAM) for the company to keep reinvesting its capital at high rates of return
    • Company has optionality to grow
  • Valuation makes sense given the business quality (taking the TAM into consideration as well)
  • Manageable business risk

In summary, borrowing The Motley Fool co-founder David Gardner’s words, we “find excellence, buy excellence, and add to excellence over time.”

What We Avoid

It is critical to know what to avoid to do well in investing. Here are the following things that we avoid:

  • Short-termism
  • Market timing
  • Macro-forecasting
  • Leverage
  • Selling of winners (“The first rule of compounding: Never interrupt it unnecessarily.” — Charlie Munger)
  • Buying of losers just for the sake of averaging down (there’s an opportunity cost to this)