DISCLAIMER…
Disclaimer from dividinde: Happy reading!
Disclaimer from any major bank:
If you get rich on a misunderstanding despite all our hidden fees, it will be thanks to us and that is why we will allow ourselves to steal an additional 20% as a participation in the profits. If you lose all your money, it is due to bad luck. Past performance is just to show you how our strategy would have worked if we had been able to predict the future (backtesting) and if we had not played the fool with your money. Thanks to our active selection process, we do much worse than any ETF, but we have to collect a lot of outrageous and unjustifiable fees if we want our children to be able to attend a private school to become like us one day. If you can't read this disclaimer, that's normal, we wrote it in miniature at the bottom of page 174 hoping that you would miss it. We thank you for your naive... er... your trust.
INTRODUCTION
There are many ways to assess the correct valuation of a stock. I'm going to present mine, without claiming that it's the best method or that it's the one you should use. However, I hope you can take away some ideas and perhaps see things from a new perspective.
Here's what I look for in a nutshell: high-quality companies that are trading at what I believe to be a reasonable price. Dividend is an important factor for me, but it's by far not the only criterion I consider.
A quality company is characterized in particular by the fact that it manages to create value in a regular and predictable manner, even in times of economic crises. A solid balance sheet allows it to weather stock market storms, just as a solid boat is more likely to cross a raging sea than a simple wooden raft.
A PROCESS BY ELIMINATION
I've always loved detective novels in which the investigator proceeds by elimination: When he doesn't know who the perpetrator is, he starts by eliminating from the list of suspects all those who couldn't have committed the crime. The one who had a broken leg and was not in a condition to go to the steep terrain where the crime was committed. The one who was not physically strong enough to carry the body. The one who had taken a sleeping pill and was asleep at the time of the crime.
I also use this process of elimination when I want to select stocks: I start by eliminating from my list companies that have a broken leg, those that are not strong enough or those that seem to be under the influence of powerful sleeping pills...
To begin, I eliminate all companies that are not yet profitable (e.g. almost all biotechs).
Then, those that work in highly cyclical branches (e.g. Adecco) and/or which are very capital intensive and require significant investments to carry out their activities (e.g. LafargeHolcim, Schmolz + Bickenbach). The German term "kapitalintensiv" is in my opinion much more meaningful.
I also don't like "hot" technology and IT companies that can be overtaken by a competitor faster than you might think and whose products can become obsolete (e.g. AMS, Kudelski), although I make some exceptions in this sector.
I avoid deep restructuring and endless construction sites (e.g. Valora) as well as companies that are always on the verge of releasing a revolutionary product (e.g. Myriad) like the plague. These companies remind me of the phrase that is often heard about the city of Biel: "Biel is the city of the future... and will always remain so."
I am also wary of companies that spend their time making (too) large acquisitions and promise unrealistic synergies for the sole purpose of justifying their growing debt (e.g. Dufry). On the other hand, companies that regularly make small purchases that are easy to integrate interest me a lot (e.g. Burkhalter, SGS).
Excessive debt can quickly lead to bankruptcy if the economic situation deteriorates (e.g. Aryzta, Meyer Burger).
Companies that have committed huge financial shenanigans are eliminated forever (e.g. Panalpina), even if their leaders have changed several times since then. Who has drunk, will drink. The risk of recidivism is too great and I prefer to look elsewhere rather than play with fire.
I eliminate the big banks, because their balance sheets are complex, incomprehensible and full of nasty surprises hidden in every corner (scandals and upcoming trials = money that will be thrown out the window = destruction of stock market value and elimination of dividends).
THE CYCLIC SECTOR PAR EXCELLENCE
The cyclical sector par excellence and which should be avoided at all costs is that of airlines. Fortunately, since Swissair went bankrupt, it is no longer possible to invest in this sector in Switzerland! Investing in an airline is like throwing your money out the window!
Here's what Richard Branson, who has tried his hand at it, says about airlines: "Becoming a millionaire is easy. Start as a billionaire, then buy an airline."
If you are still not convinced, compare for example a long-term chart of Air France-KLM and Nestlé:
Air France-KLM
Nestle
MISSING OUT ON GREAT OPPORTUNITIES?
Proceeding by elimination, that is, starting by eliminating the potential losers, is at least as important, if not more so, than choosing the winners!
The second wave of elimination is done at my place based on numerical (quantitative) criteria that I will present to you a little later.
You will certainly tell me that by proceeding in such a radical way we will miss out on magnificent opportunities, these shares whose price will be multiplied by ten in a few years. Myriad or Wisekey will indeed perhaps (on a misunderstanding) be profitable one day and will make their shareholders extremely rich.
This is perfectly true, but honestly I don't care at all. Because this QUALITATIVE approach allows above all to overlook abysmal losses.
This is what is called INVESTING as opposed to SPECULATING.
This is also what allows you to achieve your goal of financial independence in good time...
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Thank you dividinde for this very good post. I really enjoy reading you, your approach is similar in many aspects to mine, so we feel a little less like an alien in the sacrosanct Swiss financial center.
Here are a few points that particularly spoke to me:
– “manage to create value regularly and predictably, even in times of economic crises”: same for me, I focus on “timeless” companies, which function no matter what happens outside. I particularly like the non-durable consumer goods sector (food, drinks, tobacco, cosmetics, etc.) and pharmaceutical products.
– “I eliminate all companies that are not yet profitable”: same for me too, to be avoided in particular startups, most IPOs, in short anything that does not offer sufficient visibility and predictability
– “those who work in highly cyclical sectors”: same for me, too much danger to ensure the sustainability of the dividend. I am thinking in particular of the automobile industry and of course the airlines.
– “I also don’t really like technology and IT companies”: same for me. We have seen too many times in the past “technological” monsters that seemed eternal collapse in the space of just a few months, just because they missed a technological turn. Let’s think of Eastman Kodak for example. Today Apple, Microsoft; and Google seem unbeatable, but what will happen in 10 or 20 years? There is a good chance that at least one of the three will no longer exist. There is only one “tech” that is a real exception, IBM, because it has managed to completely reinvent itself already 3x during its very long existence.
– “I eliminate the big banks, because their balance sheet is complex, incomprehensible and full of nasty surprises hidden in every corner”: same for me… too much swindling, too many bonuses, too much complexity as you say. Finance is a simple thing that bankers wanted to make complicated to enrich themselves on the backs of their customers. On the other hand, I single out the small local banks that still offer real banking services that are useful to society.
– “The cyclical sector par excellence and which must be avoided at all costs is that of airlines. Fortunately, since Swissair went bankrupt, it is no longer possible to invest in this sector in Switzerland!”: 100% agree and I speak from experience since Swissair was my only bankrupt investment for 17 years. But, even if I lost a little money at the time, I would say that it mainly taught me a very good lesson! Thank you Swissair for changing my way of investing 🙂
Thank you for this article. Since you are based in Switzerland and your strategy focuses on dividends, I wonder if you take into account the tax aspect. Indeed, in Switzerland, capital gains (i.e. capital gains) are exempt from income tax (but are certainly taken into account for wealth tax), unlike dividends, which are taxed as income (there is first an automatic deduction of 35% of withholding tax, then dividends must be declared as income, withholding tax reimbursement can then be requested).
I will let dividinde answer in more detail since he is the one who wrote the post and I know that he is very particular about the tax aspect. Personally, I have always thought that the tax aspect is a secondary problem for dividends. By focusing too much on it, we miss out on real income-paying nuggets. In the long term, as long as we choose quality companies with increasing dividends, we largely cover the tax constraint. Reasoning only on withholding tax is like focusing only on dividend yield (in the end it is the same since we are only looking for the highest possible net yield). The most important thing, however, is that this dividend is well covered by the profit and that it increases over the long term. As long as this is the case, we will always be winners, even if we leave a small part to the tax authorities. And let's not forget that the strategy of increasing dividends implies that the price also increases in proportion to the income and that we therefore also benefit from the capital gain not taxed in Switzerland.
Thanks for your feedback!
@Jérôme: Your experience with Swissair is very interesting, it confirms what I have always told myself: There are less expensive ways to get high...
Jokes aside, I have had similar experiences, especially when in 1999 and 2000 I bought fake companies that were just blowing hot air by surfing the internet wave to sell shares that were worthless. Of course, it ended as it was supposed to end and it served as a lesson to me.
After the bursting of the technology bubble, I moved on to technical analysis and there too I burned my wings, before finally understanding (finally!) that to succeed in the stock market you just had to keep it simple by investing in the long term in traditional defensive stocks that produce tangible goods that we use in everyday life.
It's ultimately a bit like happiness, which we always look for elsewhere, even though it's often right under our noses...
Our paths are definitely very similar. I also got lost in technology in the 2000s and I also got into AT right after.
Today I tell myself that all this was a necessary evil, just to open our eyes and find, as you say so well, what is right under our noses, and especially in our fridge 😉
@Laurent Martin. I attach a lot of importance to tax aspects, even if as Jérôme said we should not focus only on that, with the risk of missing out on real gems. It is not only passive income that counts but also total return!
In any case, all things being equal, I clearly prefer to invest above all (1) in my reference currency as well as (2) in tax-advantaged investments. I may write a more detailed article on this subject one day.
The strategy to adopt also depends a lot on whether you are in your "wealth accumulation" phase or in your "living off the fruits of your tree" phase. You can also read about this in the discussions between Jérôme and me under Tutorial / financial independence.