“Cutting through the noise”
In an age where the average holding period for stocks is measured in months, not in years, it is a big hurdle for investors to be invested in the companies that will compound value over many years. We, at Banque Havilland, believe that the greater short-term focus in today’s world opens up an opportunity for investment strategies that concentrate on long-term growth opportunities. Further, investors should focus on the underlying business, not on market prices.
Q: How did you start investing?
A: My introduction to the stock markets came in the 1990s, at the age of 13. However, it took several years before I actually started to invest, instead of speculate. The legendary investors’ teachings, including Warren Buffett, Charlie Munger, Philip Fisher and Peter Lynch, completely changed the way I think about business and investing and have certainly made me a better investor. Unfortunately I started reading books about investing much later than Warren did (he was just 7 years old). For us, investment process is the key.
Q: You mentioned the word ‘investment process’. Could you describe your investment process and how you select equities for your clients?
A: You can’t control the outcome but you can control the investment process. In order to get the best possible outcome you must have a sensible investment process in place. For a long-term investor (like us), leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. We spend a lot of time looking for companies that consistently earn high return on invested capital (ROIC) and return on equity (ROE). During stock market turmoil (like during the financial crisis or more recently during the December 2018 market correction) it is much easier to sit and hold on when you know that you own quality companies that will very likely compound value over years versus sitting with a portfolio of average companies that in most cases do not generate, or even worse, destroy shareholder value.
Q: Could you provide some company examples and why you like them?
A: I could spend hours talking about the companies that we like. But, I am happy to give one example here. Starbucks is a coffee brand that has become a lifestyle for many people. And, for many people, the day doesn’t start until they have had their first cup of coffee. Whether one prefers to drink the coffee in the restaurant or on-the-go, Starbucks is the natural choice. While we acknowledge that the growth prospects for Starbucks in the US (which represent close to 70% of group sales) are relatively low as the chain has increased its store base significantly over the past decade, we find Asia (more than 15% of group sales in 2018), and China in particular, a very attractive long-term growth opportunity. Coffee consumption per capita in China is about 4-5 cups per year while it is 750 in Europe, and about 400 in the USA. Starbucks recent plans include doubling its store base in China over the coming 5 years, which would amount to opening roughly 600 new Starbucks a year, or one every 15 hours. And finally, the return on invested capital for the Chinese stores is over 70 percent already in year one. On one hand, we have no idea what will happen with the shares over the short-term. On the other hand, as long as the company continues to increase both its earnings and cash flows simultaneously while generating a high return on the cash reinvested, we are relatively confident that, over time, this will compound shareholders’ wealth. By the way, there is another US based consumer discretionary company that we like a lot, Tractor Supply. Over the past 20y period the share has delivered a total shareholder return of close to 6,000%, or an annual return of nearly 23%, and we see that the company has (still) a long-term growth strategy in place.
Q: Is there anything you would like to add?
A: My approach to investing is to study markets and invest in long term companies, which have the potential to vastly outpace other companies and industries, sticking with them as long as the theme is intact. Forget about short-term trading and use the time to understand the underlying business, not to monitor the market prices at every second. Moreover, I would recommend investing in companies with a solid track record. If you buy into an early-stage company with little or no sales (perhaps a junior mining stock or a biotech company) most often when one revisits their balance sheets a couple of years later, they generally still display negative earnings and cash flow.
Arimatti Alhanko
Senior Investment Advisor
