While there is no way to guarantee every stock an investor buys will be a winner, Merchant Group’s Andrew Chapman says the difference between success and failure often comes down to three attributes.

Mr Chapman founded Merchant Group 10 years ago, and has since grown it into a $180 million funds management group investing in a broad range of companies with a focus on those perceived to be undervalued or under-researched.

Speaking to Reach Markets, Mr Chapman said he likes to use a management technique he learned in the years he spent managing pubs and hotels to help identify good investment opportunities.

“It’s called management by walking around,” he said. “There’s a lot to be said for that in this small-cap space.”

‘Management by walking around’ refers to the practice of researching a business, its managers, its market and competitors, and understanding the risks and opportunities it presents before buying.

It is a technique Mr Chapman employs regardless of how he intends to take a stake in a company, whether it be through a placement or on market.

“If you understand that correctly, then the macro environment – with the exception of a black swan event like a pandemic or the GFC or something of that nature – doesn’t have a huge impact on that micro side of things,” he said.

“We often find that the difference between making money and not really just boils down to whether companies have three things: time, money and brains.”

Mr Chapman said that in his experience, when a business does not perform as expected, it is usually because one of these three ingredients is missing.

In these cases, Mr Chapman said he will sometimes look for ways he can assist the business to rectify any issues it may be having.

“I like to have a stake in a company that’s meaningful. I don’t really like being a huge passenger where you’re just sitting there and hoping for the best from your investment,” he said.

“We like to have enough of a stake if we get involved in something and it doesn’t work for whatever reason, we can have some influence or assist in driving change. We do a little bit of that.”

Mr Chapman noted that investors can often give businesses they take a stake in more money, and equally they can give them the time they need to grow by waiting.

“Sometimes you need to find a brain from somewhere too,” he said, adding that assisting businesses in this manner can also be a smart idea for savvy stakeholders.