A Man's Search for Value

I have my capital. I have my set of tools. I now need to start searching for companies with market beating potential.

Such companies are likely those that are currently being overlooked by investors. Companies that have sound fundamentals and growth potential, but have for one reason or another encountered difficult times that have caused investor sentiment to cool, or perhaps companies that have never gained popularity.

I’m starting with a relatively small amount of capital and am not bound by fund rules or a fiduciary duty to others, meaning I can consider all opportunities available on my chosen trading platform. As such, I will have plenty of opportunities to investigate. 

I will narrow down the list of potential opportunities by first focusing on revenue generating small and micro cap companies based in the UK. I will prioritise revenue generating companies as while pre-revenue, deep-science companies have the potential for outsized outcomes, my lack of relevant technical knowledge required to effectively appraise such companies means they are outside my circle of competence. Operating outside my circle of competence increases the risk of selecting the losers rather than winners. 

The FTSE All-share index has risen steadily over the past 12 months as investors have taken advantage of the perceived low valuations of UK equities as they seemingly diversify away from the US. The PE ratio of the All-share index currently stands at 21x, which is higher than the longer term average of 15x. The elevated PE ratio does indicate potentially frothy valuations, but I feel there will still be opportunities lying in my focus area of small and micro cap companies, especially given the take private activity in recent times.

My immediate focus is on smaller companies in the UK market, but I will remain open to prospects in other markets. I will also seek opportunities to invest in larger, more established, companies with a long track record of strong performance and attractive sustainable competitive advantages. I expect to seriously consider investing in larger companies when valuations become attractive during times of stress at the company, sector or macro market level.

Key takeaways from this month:

• There are more companies to assess than I have time to review, and time is my most precious resource. I will aim to be as effective as possible with the time I have by focusing my attention on those companies that are arguably within my circle of competence.
• I expect my circle of competence to become clearer over time as I progress along my journey. Carving out pre-revenue companies from my world of addressable companies is my first step in defining my circle of competence.
• The aim is to invest in carefully curated companies. I must remember that market beating potential isn’t easy to find. I shouldn’t be disheartened if it takes a lot of time to find my next direct investment, I just need to remain disciplined with my approach and appreciate that I can still capture value via my regular fund investments.

Thanks for reading. Ahead of publishing my next article I’ll be working on identifying the first few companies that warrant a deeper dive and starting to build my checklist of pre-investment questions.

P.S. – As I near the end of the second month of my journey I’m pleased with the progress made. I am trailing my target of 7 hours per week (currently c. 4 hours), but I’m ahead of my projected number of articles written, and I’m really enjoying the process.