Our Investment Framework is simple yet powerful
Quality of business matters the most. Poor businesses rarely provide lasting gains. Excellent ones often exceed expectations as they grow by leveraging their strengths.
Valuation is vital. We are glad to pay a reasonable price, if the business otherwise meets our requirements. We do not consider stocks with sky-high valuations, even if they are great businesses, odds of gains in such scenarios are very low.
An Excellent business with a cheap valuation is a very rare find. More often often, we buy Excellent businesses at a fair price, and then we rely on this developed trait to compound gains.
We determine the quality of a business by deeply understanding its model, ecosystem, strategy, and operations combined with a critical analysis of its finances
Business Understanding
Get to understand the business from an owner’s viewpoint. What is the model? Keys to its success? Brand ? Pricing power ? Monopoly ? Competitors ?How sustainable is the model over time ? How easy is it to be disrupted ? Disaggregated ? How is the management ? Company culture ? Loyalty and enthusiasm of the employees ?
The questions are many. To select the right ones to examine and gain enough insight into the business to be able to decide on its future worthiness takes experience and ongoing learning. To add to the complexity, businesses and their environments change, sometimes right in front of your eyes, and sometimes slowly like a boiling frog.
“To truly understand a business, you must wear all the hats, before you can take some of them off”
Financial Analysis
Accounting is the language of business. Get good at it fast. Otherwise you will always be a tourist in business-landia. Accounting decisions by management are built on bean-counting, but don’t end there. The financial statements of a business are nowhere near as firmly set in stone as many believe.
Management has huge discretion in how to present the numbers, and it can build two completely different income statements and resulting profits, depending on several key assumptions. Balance sheet strength matters. Debt can be risky, however it is also beneficial to reduce taxes. How a firm classifies operating and capital expenses matters.
And in the new economy, there are invisible intangible assets like IP, which may be approximated via R&D budgets, but not exactly.
“Revenue is vanity, profit is sanity, but cash is king”
Valuation is both a science and an art. We use multiple methods to reach a quantitative value and then use our experience to arrive at a final range
Valuation Judgement
Business knowledge and Accounting expertise enable you to judge the state of the business, and its prospects. The final step in stock selection is to decide on a valuation for the business .
This can depend on several factors, including comparable alternatives, industry condition, prospects for growth, stability or decline, macro factors like the central bank’s rate of interest and many more.
Once you decide on the valuation, whether to pay the current market price which may be higher or to wait comes into play. Ultimately, the range of acceptable valuation depends on your risk appetite.
“Price is what you pay, value is what you get”
This framework builds long-term wealth only when we practice patience to let compounding happen over time
Patience
The two most important times in investing are buying and selling.
Patience is required when buying to wait for the right opportunity and not jump in because the money has to be deployed immediately.
Similarly, you need to develop the fortitude and patience to not sell too early or in a panicking market.
Investing, like business, does not deliver a fixed result every month or year. There are cycles, some long, some short.
The only legitimate reason to sell is that the investment does not meet your criteria anymore because either the pricing has far outpaced business fundamentals or there is a structural change in the business or its marketplace.
“The stock market is a device for transferring money from the impatient to the patient”