I’ve recently set up a private investment company, CV Capital. The main purpose of setting up this investment company is for long term wealth creation and to get an audited track record of investment performance. Most of my net worth (outside the family home) will be invested into the company.
I thought I write some ground rules for family and friends who will be fellow shareholders:
- Investing is about trying to predict the future regardless of whether the future payoff is based on clearing 1 foot hurdles or 10 foot hurdles. Although selected investments can have excellent risk reward relationships, bad luck can strike. Therefore, investment returns cannot be guaranteed. However, I promise I will endeavour to bring the risk (which I define as permanent loss of capital as opposed to unrealised loss from market quotations) to an absolute minimum.
- The equity market is by its nature volatile. Benjamin Graham (the father of value investing) said that “in the short run, the market is a voting machine but in the long run, it is a weighing machine” which means that in the short term securities can get overvalued or undervalued but over the long term they revert back to their true (intrinsic) value. So whether our results are satisfactory should not be measured whether we are up or down for any given year. Rather performance should be measured over a medium term horizon (say 3 to 5 years with my preference for the latter).
- I am a big believer in opportunity cost and as it impractical to invest directly in all the constituents of the ASX 200 index (which changes from time to time); as a proxy for the market I have chosen the Statestreet ASX 200 exchange traded fund (ticker: STW) as our yardstick. This ETF has a good record for tracking the ASX 200 index and is low cost. In the event that our performance result is inferior to the yardstick over the medium term (3-5 years), then I suggest we find other places to put our money. An exception to the above statement is if our measurement period coincided with a speculative bull market (for e.g. the tech bubble in 2000).
- The implications of the above two statements is that you should only invest funds which you can put aside and stay invested over the medium term.
- There will be costs associated with running the company, (e.g. audit fees, ASIC fees, travelling cost for attending AGMs). I will attempt to keep cost to the minimum and don’t expect the cost to exceed $10,000 p.a. In the event the investment returns exceed the yardstick, a bonus may be paid. This bonus will be capped at 25% of the excess returns and is payable at the director’s discretion.
- The returns and financial position of the company will be audited by an independent accountant.
- The company’s share price will be quoted on a net asset before tax basis. Share issuance and buybacks will be based on this value. The window for share buybacks will be once a year after the year-end book closing with a month’s notice required.
The investment principles in which I will operate the company are as follows:
- Invest in securities in which I can understand well enough to be able to value with a good degree of confidence.
- Minimise the risk of a permanent loss in capital by selecting undervalued securities trading at an adequate margin of safety (i.e. trading at a large enough gap to its true/ intrinsic value).
- I will cast a wide net to search for mis-priced securities which means not limiting our investment to the ASX and equities (although I anticipate the bulk of our investment to be in equities).
- Patiently wait for market to present opportunities and when they appear, invest significantly with a view of holding for the long term.
- Diversify the portfolio to protect against adverse events/ bad luck but not to an extent where it starts to dilute our performance. I anticipate the portfolio having anywhere between 5-10 securities.