A sustainable competitive advantage is the ability for a business to do something that its (potential) rivals cannot. It means being able to: Keep the business’s current customers;[1] and, (Possibly) grow by attracting new customers; On terms which are more profitable than the business’s competitors; For a reasonably long-time (it is sustainable not temporary). I [...]
Archive for February, 2010
What is a sustainable competitive advantage?
Posted in Competitive Advantage - 1 on February 26, 2010 | 4 Comments »
Why a business, which I have predicted will have a high ROIC, must have a sustainable competitive advantage
Posted in ROIC and Competitive Advantage on February 25, 2010 | Leave a Comment »
I think the main reasons for why a business can have a high return on invested capital (ROIC) [1] [2] are: The business has had good luck; The business has been more operationally efficient than its competitors[3]; The business has a sustainable competitive advantage; The business has a temporary competitive advantage; The business’s earnings are [...]
Why I value a business using its ROIC instead of its ROE
Posted in ROIC versus ROE on February 24, 2010 | 2 Comments »
I value a business using its Return on Invested Capital (ROIC) [1] because this profitability measure is independent of the business’s capital structure (the proportion of debt and equity). [2] A business’s Return on Equity (ROE) is not. I think the valuation of a business should be independent of its capital structure because the business’s value [...]
How a business’s ROIC tells me if its earnings growth will be profitable
Posted in Earnings Growth and Profitability on February 23, 2010 | 4 Comments »
In my last post I said that if a business’s ROIC has been, or is, greater than my discount rate, I think the business is likely to be viable. I also said it means that any growth by the business is likely to be profitable for me. In this post I am going to explain [...]
My Discount Rate
Posted in My Discount Rate on February 22, 2010 | 2 Comments »
I will usually only buy a business if its Return on Invested Capital (ROIC) [1] is greater than my discount rate (except for the last year).[2] I adopt this approach because if a business’s ROIC has been, or is, greater than my discount rate, I think the business could be viable. It also means that any [...]
I usually do not buy businesses if they are new or unlikely to survive
Posted in Will the business survive? on February 19, 2010 | 1 Comment »
If a business has not been operating profitably for at least five years I will usually not buy them Young businesses are seductive. I often want to buy them because many of them sell great new products or services and have strong profitable growth. However, the problem with buying such businesses is that they have [...]
My Investment Process – The Basics Part 3
Posted in The Basics - Part 3 on February 18, 2010 | Leave a Comment »
What information I use to value a business I think Montier is right when he says you should value a business by focusing on its key elements: “…Studies suggest that rather than obsessing with the bewildering informational fusion of news and noise we should concentrate on a few key elements of a business i.e. what [...]
My Investment Process – The Basics Part 2
Posted in The Basics - Part 2 on February 17, 2010 | 3 Comments »
Does the business look like a bargain? My default assumption is the market has priced the business correctly I assume that the market price of any business is correct until I can provide strong arguments otherwise. I agree with Klarman when he says; “a bargain should be inspected, and re-inspected for possible flaws.”[1] Why businesses [...]
My Investment Process – The Basics Part 1
Posted in The Basics - Part 1 on February 16, 2010 | 1 Comment »
I try to buy businesses (i.e. shares) that I think are ‘cheap’.[1] I define a ‘cheap’ business as a business whose price is significantly below my estimate of its intrinsic value. The intrinsic value of a business is what I think the business is worth to a rational businessperson. I estimate it by calculating the [...]
Why I do not make group investment decisions
Posted in Group Decision Making on February 15, 2010 | 1 Comment »
I always make investment decisions by myself and not as part of a group. This is because there are some major problems with group decision-making. One major problem is that it is likely to increase the confidence I have in an investment decision without leading to any greater accuracy in that decision (confirmation bias).[1] This [...]
Categories
- Asset Allocation
- Competitive Advantage – 1
- Competitive Advantage – 2
- Competitive Advantage – 3
- Controlling emotions
- Customer Captivity
- Earnings Growth and Profitability
- Economies of Scale
- Falsifying scenario’s
- Group Decision Making
- Ignoring market moves
- My Circle of Competence
- My Discount Rate
- My Quantitative Valuation Model – 1
- My Quantitative Valuation Model – 2
- Normalising Earnings
- ROIC and Competitive Advantage
- ROIC versus ROE
- Talking to Management
- Technology and Competition
- The Basics – Part 1
- The Basics – Part 2
- The Basics – Part 3
- Valuing using scenarios
- When to Sell
- Will the business survive?
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