How does it feel for you when you invest? Do you get nervous when stocks fall? Do you get frustrated when stocks rise without having invested?

When I invest, I pay close attention to my emotions.

Firstly, I check if I’m influenced by fear or greed.

 If that’s the case, I do nothing. Neither buy nor sell.

It Should Feel Like a Safe Investment 

Secondly, I check if it feels “safe.” 

I want to invest based on a sense of robustness, security, and certainty. Of course – who wouldn’t want that?

I’m here to tell you that it’s possible.

This doesn’t mean that the price won’t fall after I’ve invested. But if it does, I buy more shares.

How do I achieve that sense of safety and security? 

Well, I’m not an oracle. To reach that feeling, I go through a checklist and answer a lot of questions. 

I do the research, and then I check in with my inner barometer.

Here are some of the things I look at:

1. The Company’s Products

Do I believe in what the company sells?

Is it a good product or service? Do I personally like it? Do I use it? Or do I know someone who uses it? 

Will there be more of the same in the future?

Are they good at innovating with the product and coming up with more products?

 2. The Company’s Leadership

Who is the management?

Do I trust them? What do they stand for? What are their values?

I especially like owner-led companies or companies where the CEO owns shares and thinks like an entrepreneur.

Here, I carefully examine the management’s letters to shareholders and read them chronologically. I look at what they have promised in the past and whether they have succeeded.

If they haven’t succeeded, are they honest in explaining why? Or do they sweep it under the rug?

I also look at whether they have conducted share buybacks and at what price. It should be at a reasonable price. If the management just buys back shares at unreasonably high stock prices, they dilute the value – perhaps in the hope of maintaining or plumping up the share price – but it’s not a viable strategy.

I also look at how the management is compensated. Are the bonuses fair? Is there a sound incentive structure?

Finally, I examine the composition of the management. Are there diverse competencies and types of people? I’m not interested in investing in companies where the top management and the board consist of only one specific type (e.g., only men).

3. Growth and Development

How do the numbers look?

Is revenue growing consistently? What about profit?

And the equity? Is it also growing at a steady pace?

I prefer to invest in companies with high growth on all three fronts.

Some people talk about growth investing versus value investing. That’s nonsense.

Without growth, it’s difficult to make a good investment. As a value investor you should focus on investing in growth companies – at reasonable entry prices.

When I quickly skim their numbers, I also check that they don’t have too much debt (they should be able to pay off their long-term debt within three years).

4. Competitive Advantages

Can the company protect itself against threats from competitors? How do they retain customers?

Here, I go through a range of possible competitive advantages. I prefer the company to have at least two, preferably three of them.

Competitive advantages can be, for example:

• Size (economies of scale)
• High entry barriers in the industry
• Branding
• Network effect in the use of their products
• Switching costs
• Special knowledge, data, or secrets
• Power position regarding suppliers or distribution

Most students who come to the Value Investor Academy easily overlook this point.

Competitive advantages are something you need to train yourself to spot.

5. Peer Comparison

Lastly, I compare them to their competitors.

Who are the others out there?

How do their growth, profitability, and equity development look?

Is our candidate a market leader? Is it growing faster than the others and hence eating up market shares? 

Or are there others out there who are even better candidates in the industry?

6. Value vs. Price

I calculate the company’s intrinsic value and ensure it’s higher than the stock price. In other words, you get more value for your money than what you pay. 

If you buy stocks when the stock price and market value are above the intrinsic value of the company, there’s a high risk of losing money in the long run – even if the company is a wonderful company.

It may sound complicated to calculate a company’s value, but it’s not. It can be done on the back of a napkin (you can learn to do it in my e-book Free Yourself).

I also check that the stock price is not at its all-time high. If it is, it’s probably not a good time to invest – at the very least, it’s a good time to reassess.

The Feeling of Security Comes From Research

The sense of investing in something safe comes from knowledge and research.

Clearly, nothing is certain in this world. Everything you do will come with a degree of uncertainty. 

Even when you cross the street, you can’t be 100% sure that you’ll safely make it to the other side… but you can feel safe while you do it. 

If you know the area and the traffic rules, you can cross the street without getting a feeling of anxiety at the sound of the smallest scooter. 

In the short term, we cannot be sure how the stock price will develop. But in the long run, we can have quite a lot of certainty if we know the rules of the game and understand what a “wonderful” company is.

One thing is certain in the stock market. Stock prices go up and down, and down and up – all the time. They’re like goldfish in a bowl. 

That’s part of the game.

Security comes from doing solid research and understanding the mechanisms of the stock market.

Just like you feel more secure crossing the road when it’s one you’re familiar with and you know the traffic rules. 

So get to know the traffic rules in my e-book Free Yourself here.

John M. Keynes is known for being a groundbreaking economist, but few know that he was also a talented value investor.

 He achieved an average return of 12% per year from 1927 to 1947, which is an impressive performance considering that the overall stock market declined by 15 percent during those years.

It was a period in history marked by the crash of 1929, the Great Depression of the 1930s, and a world war. Despite these challenges, Keynes managed to achieve phenomenal returns.

Before 1929, he was a macro speculator, always trying to figure out if the market was moving up or down. He did suffer losses during the big crash – losses that led him to transform his investment approach.

He shifted his focus from speculating on overall market trends to analyzing the businesses he invested in.

Keynes lost 80% of his personal wealth after the 1929 crash but learned a valuable lesson from it. He realized that attempting to predict market trends as a whole was too difficult because the market is inherently unpredictable and capricious.

Once he understood this, he changed his investment philosophy and transformed his personal wealth, as well as the fund he managed.

Keynes Became a Value Investor 

When he died, he left behind $30 million (adjusted for today’s value). He neither inherited anything nor received payment during the last six years of his life. He sponsored art and different events. 

 The Financial Times commented on his death:

 “Some surprise has been expressed about the large fortune left by Lord Keynes. Yet Lord Keynes was one of the few economists with the practical ability to make money.”

 In addition to his personal wealth, he managed the Cambridge King’s College Chest Fund, which achieved an average return of 12% annually during that period.

 How did he do it?

 The following quote summarizes his investment style well:

 “My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power, and where the market price seems cheap in relation to these,” Keynes said.

 Well, hello. That’s the essence of value investing.

 In a memorandum from May 1938, he summarized his own investment philosophy.

 Here are the three pillars of his style:

 1. Careful selection

He carefully selected a few investments, considering whether they were cheap relative to both the current intrinsic value and the potential intrinsic value in the future. He also compared each investment to alternatives.

In other words, he only bought stocks when the company’s actual value (intrinsic value) was significantly higher than the stock market price. 

2. Holding on steadfast 

Keynes was a patient long-term investor.

 Stocks sometimes crash, and Keynes learned to remain calm in the face of such situations.

 As he famously said, “The markets are moved by animal spirits, not reason.”

 After 1929, he understood that there was no logic to how high stocks could rise or how deep they could fall.

This is because the stock market behaves irrationally at times, driven by greed or fear. As an investor, you need to endure these fluctuations and hold onto your investments based on reason.

“I should say it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself,” Keynes said. 

 3. Portfolio balancing

Keynes had a few large investments, but they were well balanced against each other, exposing him to different types of risks. 

He invested internationally, leaned towards mid-cap and small-cap stocks and avoided technology IPOs (at that time, technology typically referred to the automobile industry).

After 1930, he typically held positions for at least three years (you can read about this in the essay “Keynes the Stock Market Investor” by David Chambers and Elroy Dimson, which you can find online).

He was sometimes criticized for having too few and large positions.

To this, he apologized with the sarcastic response, “I was suffering from a chronic delusion that one good share is safer than 10 bad ones.”

If you want to learn more about how to select a few good companies as a value investor (instead of ten bad ones), I suggest downloading my e-book Free Yourselfhere.