How to think like an investor – and not a gambler

If gambling on shares is your thing, then perhaps this blog is not for you. On the other hand, if what you want are sustainable, growing returns – over the long term – then read on.  Because, below, I set out some simple steps to help you make better investment decisions.

The vast majority of people who invest in our funds have arrived at a point where the time taken to analyse businesses and calculate intrinsic value is better spent with family and friends, running their own business or pursuing leisure activities. As one wealthy investor quipped rhetorically, ‘what’s the point of being wealthy if you’re tied to your computer?”

The outperformance of Montgomery funds, since their inception, demonstrates that it is entirely possible to beat the market and that there is merit in researching individual company opportunities. For investors who wish to go it alone and build their own direct share portfolio, that is good news indeed. This article is all about identifying high-quality businesses and buying them for less than they’re worth.

Before we begin, it is vital to differentiate between speculating – an activity that is all too common during the COVID-19 lockdowns – and investing. Investing treats each share as a piece of a business. Speculating, however, is betting on the ups and downs of the share prices. Speculating is gambling and gamblers tend to lose. Of course, hope springs eternal and so there is never a shortage of speculators who boast of their success, no matter how fleeting that success inevitably is.

According to Benjamin Graham, the founding father of modern security analysis and the mentor of Warren Buffett, “Investing is most successful when it is most business-like”.

At Montgomery, we are not inclined to own a little piece of a business (stock) for 10 minutes if we would not be prepared to own the whole enterprise for 10 years. That disposition forms part of our investment philosophy, which permeates our entire investment framework and process.

When one starts treating shares as an ownership stake in a business, the entire approach to allocating capital changes; instead of betting on a piece of paper that wiggles on a screen, we become interested in how the underlying business makes money, how it fits within its competitive landscape, and how much it could grow by and for how long. Owning a business also changes the way you think about selling. If you owned a successful Australian business outright, would you sell it because there were concerns over who might be the next US president, or because Europe’s inflation rate had just picked up? Of course you wouldn’t.

The issue, however, is that your business is not owned outright, it is shared with thousands of other investors, many of whom react irrationally to US presidential nominations and European inflation rates. The consequences of their emotion, impatience and fear is that the price of your business changes daily, moving up and down like a yo-yo.

The key to approaching investing in a business-like manner is to prevent the daily ups and downs influencing your view of the underlying business. If the share price falls, instead of running for the exits you may want to buy more of that great business.

If the idea of investing in outstanding businesses appeals to you more than gambling or speculating on share prices, you’ll need a set of tools to help you identify and value those outstanding businesses.

And before you start employing those tools, you will need a framework. A framework is your ‘How To’ manual for those tools.  At Montgomery we have distilled our framework into three components: 1) Quality, 2) Value, and 3) Cash when quality and value are unavailable.

In the two follow-up blogs, I’ll discuss why businesses should limit the amount of money they pay out as dividends, and the three essential criteria to look for in order to identify outstanding companies to invest in.

You can view part 2 here: THE MAGIC THAT HAPPENS WHEN COMPANIES INVEST IN THEIR BUSINESS 

 

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
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Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
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Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
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Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
UNLISTED FROM $25,000

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

New Fund

Montaka Global Extension Fund (ASX: MKAX)

GLOBAL
An ASX-quoted managed fund, typically, the Fund seeks to hold 15 to 30 long positions and partially offsets these with 10 to 40 short positions, operating with 130% exposure to its long portfolio and 30% exposure to its short portfolio, resulting in a net market exposure of around 100%. Features a target distribution yield of 5% per annum.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted from $1million

Montaka Global 130/30 Fund

Global
Provides the opportunity to benefit from both the gains of extraordinary businesses and the declines of deteriorating businesses through a global equity active extension strategy, which has the potential to significantly outperform the broader equities market over time. Seeks to generate double-digit annual average returns, net of fees. Daily priced.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.