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Hey everyone, today we're back to break down a truly formidable investment strategy . Have you ever wondered how the cream of the crop of fund managers manage to beat the market, and especially how? Well, let's dive into the heart of the matter and discover together the philosophy of the free investor.
It is ! Just imagine the scene. On the one hand, you are buying a car of exceptional quality. Okay, it costs an arm and a leg to buy, we all shed a little tear when we write the check, but afterwards it's a dream, zero breakdowns for 10 years. On the other hand, you take the cheap wreck option. At first, you rub your hands together thinking you've made the deal of the century, but very quickly it's a disaster.
The mechanic becomes your best friend and the bills pile up. Well, in the stock market, it's literally the same thing. This is the famous "buy once, cry once" concept. Basically, buy quality and you'll only cry once . So on the agenda for our analysis today, we'll look at the buy once rule, how to identify the real winners, the famous dividend trap, the importance of paying the price and finally how to look under the hood.
We'll start right away with our first major principle, the buy once rule or the art of buying quality. And to show you that this isn't just hot air, look at this figure: 500%. Is that huge ? This is the return generated since 2010 by the British fund Fundsmith, managed by the legendary Terry Smith. And believe me, you don't achieve 500% by chance.
This is the raw result of a relentless strategy applied with military rigor. Their secret lies in three small steps. It's almost too simple to be true. Step 1, buy good companies. Step 2, don't overpay. And step 3 is my favorite: doing nothing . Yes, you heard right, do absolutely nothing. Once you have quality in your portfolio, the hardest part is sitting back and letting the magic happen.
Which logically leads us to our second point: how do we identify these famous true winners, these champions of the ? Terry Smith's method actually reminds me a lot of Alex Bird's story. He was a super clever British bettor who literally waited for a horse to cross the finish line to place his bet, taking advantage of the bookmakers' reaction time .
In short, in finance, the idea is exactly that: bet on the horse that has already won. And to recognize these already victorious horses, we have an infallible checklist. We need to look for very high profit margins , a return on assets, the famous ROA that is really solid. And above all, the most crucial point of all, deep protective moats.
These moats are your ramparts. It is these competitive advantages that prevent competitors from nibbling away at the market share of the leader. This is completely in line with Warren Buffett's famous silver ball test. It's a really interesting little thought experiment . Imagine that competitors in a sector only have one ammunition, a single silver bullet.
Which company would they choose to eliminate? The company that makes its rivals sweat the most , well bingo, is usually the true undisputed champion. Let us now move on to the 3rd point, the dividend trap or what we might call the illusion of return. There is a monumental mistake that many investors make, which is to dismiss an incredible company just because it does not pay dividends.
Seriously, on one hand, we have the dividend, which is nice, we receive a check every year which gets heavily taxed in the process. To return to our luxury car metaphor, demanding a dividend from a growing company is like demanding a completely useless fluorescent spoiler on a Ferrari. On the other hand, we have the real striking power, the cumulative effect.
When a leading company reinvests its own profits to grow even more, the long-term capital growth literally explodes the return of a simple dividend. And if you want the ultimate proof of that, look at Berkshire Hathaway. The conglomerate has paid exactly zero dividends in the last 42 years. Not a single cent.
? Because they fully understood that keeping this immense cash reserve internally for reinvestment will create infinitely more wealth for shareholders. The numbers speak for themselves. The fourth step, and it is absolutely vital, is to pay the right price. That's the whole art of patience. As investment legend Howard Marks so aptly put it, there is no good investment idea regardless of price.
In short, you can find the most wonderful box in the world with giant moats, but if you buy it at a totally outrageous price, it will be a poor investment. The entry price always dictates the future return. So the big question is, how do we buy these gems at the right price since everyone is buying them ?
Well, you have to understand the cycle and above all be patient. Generally, that's how it goes. First, analysts have completely crazy expectations. Afterwards, ! A slight disappointment with the quarterly results and then there's general panic in the markets. And it is precisely there, at that precise moment when the darling of the stock market is temporarily shunned, that your window of opportunity opens to buy at the right price.
Frankly, when faced with panic, you need to take a step back . A quarter is literally only a quarter of the Earth's rotation around the Sun. It's nothing. To cause the stock of a fundamentally solid company to plummet by 20% just because of a small weakness over 3 months is economically absurd in the long run.
But it is precisely this shortsightedness of the market that will create your best buying opportunities. We come to our last point, number 5, looking under the hood to find the real indicators. Don't just trust the beautiful painting. And that's where the great battle of the titans between financial indicators begins.
On my left, the famous P/E ratio, the price to earnings, everyone uses it except that it is based on purely accounting profits and we all know how it is, a slightly clever accountant can easily smooth the figures. To my right, the naked truth, the free cash flow yield or the return on available cash flow .
Free cash flow is the actual cash that comes in at the end of the day. It is the only arbiter , the one that separates solid investment from mere speculation. Because this very real money is what gives the company all its power. With this available cash, a market leader can do whatever they want in their market.
It can pay dividends if it wants to, it can buy back its own shares en masse to enrich its shareholders, or it can outright become a predator and buy up its competitors. A company without free cash flow is, ultimately, a vulnerable company. In short, if we had to summarize the ultimate discipline, we are not here to perform financial acrobatics.
There's no point in trying to jump over 7-foot bars by betting on the next start-up that will revolutionize the universe. No, the secret is to calmly step over 1-foot bars. Stay within your circle of expertise and find extraordinary businesses that have an easy-to-understand business model. So there you have it, the buy once, cry once rule, the obsession with real cash and the patience of the hunter.
Everything is in place to help you build a fully resilient portfolio. And this leads us to a crucial question for moving from theory to practice. Of all the listed companies today, which high-quality champion deserves to be in your sights right now? I'll leave you to ponder that. Good luck with your search everyone, and we'll catch up very soon for the next decryption.
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