Fundamental characteristics of a value investor

Today, I will be touching on an important topic that forms the central pillar of my investment philosophy. There are four aspects of value investing.

1. Value investing is taking ownership of an excellent business.

2. There will always exist a disparity in the price of the business versus its underlying value.

3. The primary basis for buying/selling out of a business will depends on a measure of underlying value versus its market price.

4. The stock market only exists as a convenient mean to buy into or sell out of the business.

How to be a value investor

It really doesn't take much to be a value investor. You do not need to be a financial guru, shrewd economist or diligent accountant to excel in value investment. These are good to have but not necessary. What is really important is for the person to have (1) rational thinking, (2) an open mind with a willingness to adopt new perspectives and (3) emotional disengagement from the stock market, courage and patience.

A Rational Mind The value investor must have a person who has a desire to improve his knowledge through his own reading up or cross sharing with others and must be able to apply what he has learnt in school to perform his own independent judgement. He must have an open mind and is willing to accept new ideas that will challenge how the general public perceive things. In this way, the value investor will be able to see what the public cannot see and achieve what the general crowd will not be able to achieve.

Emotional Disengagment from the stock market,A value investor is able to ignore the noises created in the market and hence disengage from the emotions and mood swings that comes witht the stock market fluctuations. Only when this is achieve, the value investor will be able to make sound and rational decisions, while capitalizing on the herd's foolish behaviour.

Courage This is the next most important thing after intelligence. This is one of the most difficult thing to achieve for a retail investor. A value investor need to garner immense courage to act against herd behaviour and run in the opposite direction. The next step after completing a thorough financial analysis is to wait for the right opportunity for the investor to take a swift and decisive action to purchase the stock.

Patience - "Inactivity strikes us an intelligent behaviour. Warren Buffet once said: Wall street makes money on market activity, retail investor makes money on market inactivity. The value investor has to be patient and recognise the fact that as long as value of the company has been correctly ascertained and acquired at a significant bargain, the price will take care of itself, in due time, the market will rise to match the underlying value of the stock. The value investor should direct efforts in doing more research on the company and acquire new perspectives to analyse the business. If the company business strengthen and the market still continues to ignore it, the value investor will be even happier as he will be able to purchase the stock at a greater discount. and hence making a value for money purchase.

Introduction to Courage Marine

Courage Marine was one of the stocks that I actively traded during the boom time of 2007 and 2008. My last purchase price for Courage Marine was 44 cents which coincides with the peak of the Baltic Dry Index. Since then, the stock had dropped by more than 50%. Price as of 31 Jul 09 is 23.5 cents. Even so, I attribute this to my error of trying to time the market and got myself burn. I am still holding onto this stock, as it has a sound business model and good management despite being in a volatile industry.

A general background of the company

Courage Marine deals in the marine transportation industry. It is a dry bulk carrier group which owns and operates 8 dry bulk carriers that transport raw materials for Asia's growing needs. Its fleet is deployed around Greater China, Japan, Russia, Vietnam, Indonesia, Blangadesh and elsewhere in Asia.

The vessels transport mainly dry bulk commodities such as coal, gravel, cement, cement clinker, iron ore and various minerals. One can observe that these are the basic materials required for development and is closely related to the global economic state. The fleet that company has contains, Handsize, Handymax and Panamax vessels.

Competitive Strengths of the company

In basic terms, these groups of vessels belong to the smaller class size as compared to large ones called the Capesize. The advantages of owning a smaller group size of fleet means that it gives the management more flexibility in optimising the transportation requirements to ensure full optimization of the available Deadweight Ton. In layman terms, the company ensure that every time the ship set sail, it will be loaded with the max tonnage so as to maximise the ship capacity. This is extrememly important given the volatility of the industry. It is very important to stay lean and flexible without comprising on the optimal deployment of the Group's fleet capacity.

Externally, the group has extensive presence in the Asia region meaning that it will be able to tap on to the economic boom for this promising and developing region. The group will be well placed to meet increases in the existing customers and potential new customers transportation requirements.

Internally, the group has a strong operating cash flow and a net cash position providing opportunities for the company to acquire vessels for its expansion plans.

The company comprises of a strong management team that has beening running the company in a efficiently and this is clearly the case as the company has been listed as one of the World's Top 10 Shipping company for the 3rd year in a row. This recognition reaffirms the group position as a strong and consistent performance among the world's 100 shipping firms. It also shows credibility towards the Group's asset light business model that is built on diligent cost management and prudent expansion policy.

Key downside risks

Path to economic recovery will be the key factor determining how fast the company can come out of the wood. Referring to my previous post on the dry bulk industry, one will be able to know what are the main factors affecting the valuation of companies in this industry.

Why am I still holding onto this stock?

One, it has a proven track record. Though it posted a net loss in the 1Q09, when one look at the Financial Year since the company was incepted, it has never made a loss and despite the economic downturn that plague the global economy, the company has continued to issue dividends, creating shareholder value.

Secondly, its accolades speak volume of this company. So right now, I will continue to accumulate shares of this company using the dollar cost averaging method. I hope this sleeping monster will awake soon.