The investment advisory principles practiced by Yellow Capital are rooted in the work of the late Mr Benjamin Graham, a professor of investments at Columbia Business School and author of Security Analysis and The Intelligent Investor. Yellow Capital aims to determine the worth of a company share by what Graham called “intrinsic value”; an analysis process used to determine its acquisition value.
Intrinsic value refers to a company’s private market value or liquidation value. The process is closely related to credit analysis because the return of our capital is just as important to us as the return on our capital. Investments are made at a significant discount to intrinsic value, which Graham called an investor’s “margin of safety.” Adhering to the principles of intrinsic value and margin of safety often requires a contrarian investment policy and runs counter to the general market psychology. This policy reduces the decision to purchase or sell securities to a discipline rather than an art. Value investing has its roots tied in Behavioural Finance and the psychology around investments. It is far easier to stick to a process than it is to believe in forecasts and attempt to identify certain patterns that may occur.
At stock level and when determining intrinsic value, Yellow Capital analyses the fundamental principles of the balance sheet and income statement. We research and select securities that are selling at substantial discounts to their intrinsic value. We do our own in-house research and do not buy research from analysts. We align our interests with our clients and therefore, where circumstances permit, we invest our personal wealth alongside our clients’ wealth.
Yellow Capital’s stock/fund selection criteria at the time of purchase have the following primary investment characteristics: low stock price in relation to book value and low price-to-earnings ratio as compared to other companies in the same industry, and predominantly companies with a small market capitalisation. Generally, we prefer stocks that are not covered by analysts, or very few analysts if any.
Research studies confirm a historical statistical correlation between the investment characteristics mentioned above and above-average investment rates of return over long periods. Behavioural Finance is far more relevant to investment performance than IQ; this has been confirmed not only in scientific research studies but by countless real life examples.