This post briefly touches on a few of Lockstep’s core investing principles. Sticking to investing principles increases the rate of success and lowers the risk of being forced to sell:
During this turbulent market, our primary objective is to safeguard the money we invest. While we certainly have the option to wait until conditions improve, we firmly believe that it’s precisely during such uncertain times that many investors choose to remain on the sidelines, thus presenting us with opportunities.
We acknowledge that share prices will rise and fall, and paper returns may experience highs and lows. However, it’s vital to understand that losses become real only when we decide to sell a stock. Therefore, we never want to be compelled to sell under duress. To lower this risk, we adhere to a specific set of criteria that significantly enhance our odds of avoiding permanent capital losses:
- Invest in Companies with Low Debt Levels: Elevated debt can pose a serious threat in a rising interest rate environment, as interest payments can erode profits. Although we cannot predict the precise path of future interest rates, it’s improbable that they will return to the historic lows of the previous decade.
- Invest in Profitable Companies: Companies burdened with substantial debt and lacking profitability are less likely to transform into profitable ventures as interest costs escalate. Unprofitable entities can even face insolvency, and we anticipate an increase in such cases in the foreseeable future.
- Invest When These Companies Are Attractively Valued: It’s prudent to invest when a company isn’t trading at an excessively high multiple of its earnings. While high-growth prospects can justify a premium, we believe investing at attractive valuations offers another level of safety.
- Diversify: We acknowledge that we won’t always get it right. That’s why we diversify our investments, further enhancing our chances of success.