Goals of the Investment Plan

What I want to develop is a framework for investing that allows for the following three outcomes:

1. Preservation of capital
2. Income
3. Capital growth

I believe that all three can be achieved through a careful and thoughtful process that is backed by a disciplined and patient behaviour. Too many times I have seen (and experienced) jumping into a situation at the wrong time because of a lack of discipline caused by some other external factor.

So how am I going to go about achieving my three goals? Basically, the only real way I have experienced that has demonstrated any sort of robust results is one that views each company as a long term investment where the short term price shows a mismatch with the long term value of the company. Moreover, only when the short term prospects are largely ignored can the longer term prospects be understood. And at this point, we start to get a far clearer picture of the true intrinsic value of the business.

In fact, focussing on the short term prospects of a business is too difficult to get right in the broad majority of cases. This is where the visibility is highest and thus, the most information is reflected in the price. As I see it, market efficiency certainly exists - in the short term. In the long term, where business prospects are less certain, yet can be understood within a bounded range, pricing inefficiency is far higher.

However, taking this view is far harder to achieve than one may think. Sadly, the investment world is hell bent on achieving "outperformance" from month to month, quarter to quarter, and year to year. As soon as the focus moves to month to month and quarter to quarter the chances of out performance starts to diminish rapidly. Here, it is the short term market noise that becomes important rather than the true economic characteristics of a business. As the time horizon increases, so do the chances of market beating returns.

One of the key disciplines I'm hoping to achieve is not losing sight of what an investment really is. In fact, it would be safe to say that an investment is one that:

1. Protects the original investment
2. Gives some sort of income either through returning dividends or reinvesting back into the business at an attractive rate of return.
3. Shows an increasing output as the company grows over time.

This all seems very much like the goals for the framework I'm trying to achieve. In fact, this framework is just another way of articulating a set of steps for successful investing. So how will this be achieved? In short, the plan is to approach this whole thing in a systematic way that reflects a total purchase of the company. This is what could be called "the total purchase basis". As an approach to investment, this is where things start to get interesting as it forces the view of looking at each investment in a more business like fashion. What will I get out of the business, what are the prospects, and what am I going to pay?

Pretty quickly, it can be seen that the view of each business starts to resemble a true economic investment. There is little difference from buying a business with publicly listed stock and buying a business that is closely held. In the favour of the investor in publicly listed shares, prices are quoted daily and they may represent an undervalued, fair, or overvalued valuation.

This last point is important because it forms the basis for achieving the selection of investment candidates with the original three investment outcomes in mind. Companies that are cheap should see better yields, should see a better opportunity for preserving the original investment, and they should see better chances for capital appreciation as their prices move back to a fair valuation.

It is patently obvious that buying low and selling high is the foundation of most investment. Right? However, in practice this is easier said than done despite the fact that it offers some real an understandable way of achieving the three investment outcomes. For this reason, this methodology will focus on understanding the intrinsic value of each investment as a way of understanding the real position of each investment and the overall portfolio. In fact, it could be said that intrinsic value is the center of the process. If there is an understanding of roughly what something is worth then there is a rough understanding where the risk is. In abstract terms, could it be any simpler than this?