Apollo
Investment Management
Investment philosophy
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We value businesses as would a long-term private buyer, and generally ignore
the short term views and price influence of other market participants,
except in so far as these create opportunities. In Benjamin Graham's classic
analogy, the investor is in business with a manic depressive partner, Mr
Market, who obligingly sets a two-way price every day. Most of the time,
the investor will listen to Mr Market, politely decline to take action,
and get on with real life. Sometimes however, Mr Market's price is wildly
in excess of any intrinsic value, and the investor may take these opportunities
to sell, perhaps even to retire. At other times Mr Market's price is ludicrously
low; in recent years we have sometimes been able to buy good businesses for less
than their net cash balances. At such times, the sober investor will buy, without
worrying unduly about whether Mr Market's price may be even lower tomorrow.
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We like value – buying a dollar of assets for 50 cents, for example – but
never at the expense of quality. In developed markets, legal protection
may be good enough to base decisions on the numbers alone. In Asia, management
integrity is paramount. We also prefer "operating assets", which generate
cash or will do so in future, rather than "dead assets" reliant on the
price someone else may pay.
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We like growth as much as value - but "growth at a reasonable price". One
of the easiest mistakes is to overpay for a good company, or a good story.
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In the past, decisions about value and growth usually involved a trade-off,
but in Asia one can often find stocks with outstanding long-term growth
prospects and cash-generating ability at bargain valuations. Usually, there are
stocks as cheap as Ben Graham’s famously rewarding buys during the Great
Depression; some of them meet our quality criteria, and would please a
Buffett or a Fisher. The stocks in our portfolio, overall, have growth
prospects at least matching market leaders, at a fraction of the price.
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We like dividends - especially in those parts of Asia where there are no tax
disadvantages, but anyway it is generally a good idea that excess cash be
returned to the shareholders. (If companies with a good value-adding record
want cash for expansion, investors can be relied upon to stump up enthusiastically
for a rights issue.) We are nervous of companies with no declared dividend
policy, specifically including many state-owned Chinese shares, where investment
opportunities are effectively unlimited and the interests of majority and minority
investors are imperfectly aligned. If a private buyer could value the whole business,
but the controlling stake is clearly not for sale, that theoretical valuation is
hypothetical, and the value of a share is not proportionate. We are unconvinced by
buybacks for Nasdaq stocks, still all too often at multiples of revenue and
enriching primarily the insiders, but are much more enthusiastic about buybacks
Hong Kong style, which have often been at fractions of book value and carry
immediate cash benefits.
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We try to know our companies inside out. We visit the companies, try to
read their annual reports and announcements from cover to cover, talk to
their competitors, and so on. The longer we've known them, the better.
In late 1997, I bought one stock on which I'd written a research report
fourteen years previously - although I had not been watching it continuously
in between - at just 15% of the price of my original "sell" recommendation.
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We buy securities on a 3-5 year time horizon. (Maybe even more - ideally we
would like to buy good companies at good prices and hold for ever, but in an ever
more volatile world, 3-5 years may be as far ahead as one can realistically hope
to see, and certainly we need to keep reassessing.) However, if a security
appreciates rapidly to the point where it no longer represents excellent value in
absolute terms or reasonable value relative to prospective purchases, or if new
information comes to light which causes us to reevaluate, it may be sold quite
quickly. The stock I just mentioned was sold in only three months, after it had
doubled, but we have held on to other companies which have risen far more. Our
most spectacular realised gain to date has been 17 times in nine months - what a
shame we did not have more, but that's hindsight.
Some of our stocks have moved much less, but having bought at
respectable prices we remain happy shareholders while the managers crack
on with running their businesses on our behalf, living up to (and in most
cases so far, exceeding) our expectations in terms of operations, strategic
positioning, cashflow and dividends.
Claire Barnes
Last modified: April 2003