My investment strategy is to invest in companies which businesses I am able to understand when I can buy them at a sufficient discount to the intrinsic value that I have estimated.

I would sum up my investment strategy as follows:

               1. I only invest in businesses that I can understand.

               2. I usually invest in small cap companies.

               3. I usually invest in companies with no debt or very small debt (Net Financial Debt < Net        Profit).

               4. I usually invest in companies where there is “skin in the game”.

The reason why I invest in Europe is just because I was borned in Europe and I live here, so it is easier for me to look into this market.

1. I invest only in businesses that I can understand.

I find this to be the most important. In order to explain why I believe this is true, I would first need to explain what this means to me. In my view understanding a business is:

• To know the business model well. How the company organizes and manages its assets (tangible or intangible) in order to make money. How much money a company needs to invest in order to keep its current level of profits or to grow those profits (if possible).

• To know the history of the company. I would recommend going as far as you can go. I find very helpful to read all the annual reports available in the investor relations section of a company’s website. The more the better. You normally get many useful insights doing this.

• To know what drives client’s demand for the products/services of the companies in a specific industry.

• To know the competitors. Looking at competitors will let you know who is doing a better job in a specific industry. In addition, if you dig deeper enough it will let you know why, which is more important.

• And I leave it here with a long “Etcetera…”

I find very important to know all these when you are going to invest in a company because, basically, if you don’t understand the business properly you can’t estimate the intrinsic value of the company. Therefore, If you can’t value a company:

• How do you know when (which price of the stock) is interesting to buy?

• How do you know what to do if the stock goes down “x”%? Is the market crazy and it is offering you the same company at a better price or has something happened to the business that may affect the ability of the company to make the level of profits that you previously estimated?

• How to you know when (which price of the stock) you should sell?

In my case, and following this rule of investing only in business that you can understand, I almost never would invest in the pharmaceutical, banking, biotechnology, mining and energy sectors. And if I do, it won’t be a meaningful position in my portfolio.

2. I usually invest in small companies.

Firstly, I have to say that investing in small companies is not a predefined investment criteria that I have. However, during the last 5 years I have found more undervalued companies in this segment of the market. This is not something new. It is widely known that small companies tend to be more undervalued than bigger companies are. This happens mainly for two reasons: (1) they have less or none analyst coverage than bigger companies and (2) they are too small to be investable for most equity funds. Since these two aspects seem to remain like this for the near future, I believe I will continue to find more opportunities in this part of the market.

3. I usually invest in companies with no debt or very small debt (net debt < Net Profit).

As a general rule of thumb, my criteria is to avoid companies that have net financial debt higher than EBIT. I am aware that using this criteria I will miss some good or very good opportunities, but since there are enough cheap companies that meet this criteria (very low or no debt), I prefer to keep with those.

I think a high level of debt is like carrying a heavy backpack. When there are no rocks on the road, nothing happens, but when you find some rocks along the way or a steep slope comes around (this could be a global crisis, a specific country crisis or an industry crisis), the backpack will probably make you fall and you will get badly hurt or you could even get killed.

When you are debt free you can take advantage of those crisis, you can take advantage when the opportunities arise. You could be in the middle of an industry crisis and be able to acquire a competitor in stress at a very good price. Perhaps you don’t have enough cash in the bank and you need to take some debt, but since you hadn’t any it wouldn’t be a problem to have some until the crisis is over.

It might also happen that some changes are about to come in your industry and you may need heavy investments in order to stay at the forefront of your industry. If you are debt free, you will be able to make those investments at a higher pace than competitors that carry a high amount of debt.

Therefore, I believe a company with no debt is a company that will most likely survive any crisis and that will be able to take advantages when the opportunities arise.

4. I usually invest in companies where there is “skin in the game”.

In the stock market you will find a lot of companies that have no owner. By “no owner” I mean that they are exclusively owned by mutual funds and private investors which have a very small percentage of the share capital. Almost all these mutual funds and private investors have no intention of remaining shareholders of these companies for the long term and they have any control over how the management of the company.

I almost never invest in this kind of companies. I tend to invest only in companies where there is skin in the game. These are companies where:

• A family owns the business. They normally have a minimum stake of 20%, but normally tend to have more than 50%, so they effectively control the company.
• The management has a considerable stake in the company. Usually these are companies where the CEO is the founder of the company and owns a 10% – 40% stake in the company. Sometimes more than 50%.

Why I like family owned or CEO owned companies? In this type of companies the owner normally has all (or almost all) of its wealth in the company, so they care a lot about the future of the company. They tend to manage the business thinking in the long-term survival of the company. This is very important because these companies tend to:

• Have very low levels of debt.
• Do acquisitions only when it has a strategic fit and the price is right.
• Integrate cost control in their day-to-day operations.
• Seek growth together with profitability.
• Invest in their assets (tangible or intangible) and employees in order to keep the company improving. Improving means serving the customers better, stay ahead of competition, be innovative, etc.