Aphilion Q² ’s investment philosophy is centered around valuation: what value to attach to the uncertain cash flows that characterise each risky investment? This, and not the manic search for the ‘new Apple’ , is for us the essence of equity investing.
Investing is handing over money or capital for the purpose of obtaining a financial return in the future. It creates a bond between the saver, who has 'excess' money and a counterparty (government, company) who is looking for money. Investors are looking at the expected return that is offered, and the risks involved, before taking an investment decision. If the expectations are met, then the expected return will be colledted on an annual basis.
Requirements: being well informed, and having patience.
Speculating, on the other hand, is primarily a matter between investors, who are trying to anticipate each other's behavior, feelings and thoughts to take advantage of it. One buys a share not so much because of its expected return, but because one thinks others will want to pay more for it later.
Requirements: thinking you are smarter than the rest (easy enough), but also effectively being smarter than the rest (all that more difficult).
One is investing in a share with an expected return of 11%. Given the risks, one might find this a good investment, as similar investments return only 10%. One buys the share and realizes a surplus yield of 1% annually: a good investment.
But what if the market is gradually sharing the same opinion with you, and also thinks that the 11% paid is a very good investment? Then the price of the stock will be pushed up towards the level where the expected return will reach 10%, and not 11% anymore... And this would represent a rise in the share price of 10% : a speculative profit.
Since shares consititute in essence a long term investment, Aphilion Q² is convinced that one should approach shares on the first way, as an investor : what return do you expect, and is that sufficient for you? And if one invests in this way, one will automatically be rewarded every now and then with speculative profits, because the market will never be systematically mistaken.
A bond is repaid after a certain number of years, but one must often wait a lot longer when one is investing in shares. This might not be a problem for someone who can miss his or her money 30 or 40 years, but others may want to sell their shares now and then, and suddenly only one question becomes important: how much will someone else be willing to give for these shares? Hence, a great piece of our quantitative model deals with the question: how is the market (the others) handling the valuation of a share?
Why do people pay 15 times the earnings for certain companies, but for others 25 times? What is explaining the evolution in these valuations (interest rates? risk appetite?)? Maybe we are satisfied with our above mentioned share with an expected return of 11%, but what if we want to sell after a few years and the market demands at that time 15% of similar investments? The offered price is going to be lower in that case...
Shares are essentially a long term investment and they should be valued as such. However, this does not mean that we necessarily must hold equity positions for several years, to be a healthy investor. On the contrary : a share itself may be a long term investment, but its price changes in the short term, and sometimes violently.
If one buys a share because it offers an acceptable return at a given moment, and suddenly the price goes up by 35% in the week after the purchase, then it is not at all inconceivable that the provided return at that point is no longer attractive, and then one sells. The stock was only in portfolio for a week, but one cannot consider this as speculation.
Think long term, but do it daily: that's the summary. Keep in mind that the "long term investments" of many investors are merely speculative positions that have ended badly. One will never find this kind of situations at Aphilion...