Summarizes the modern version of value investing approach of Graham and Dodd.
Partial notes: - Growth - Growth is often unstable, growth not protected by moats is very fragile. - Sustainable growth requires lasting ability to invest money at greater return than the cost of capital. Normally this requires a moat of some kind. - Moats: - It's not about: - Brand reputation, - Being the first to do X, - Ways to analyze it: - Five forces (see also Expectations Investing): barriers to entry, substitution threat, buyer vs. supplier power, rivalry. - Sustainable advantage may come from: - Exclusive license by government (although this usually comes at some cost), - Production advantage, access to a unique resource (IP, physical), - Vertical integration can produce this, - Captive customers (network effects, habits, high cost of switching), - Economies of scale, - It's easier to establish a moat in a niche market. Large global markets are too attractive. - Almost all moats are eventually eroded, it's just a matter of time. This can be modeled as P(moat_survival) each year. In the scenario where the moat doesn't survive the returns should be more like of a competitive business. - This can be approximated by introducing "fade" multiplier of growth. It will decrease future growth compared to past growth because about the past we know that the moat didn't erode but we have no such knowledge for the future. - Fade rate can be estimated from expected half-life of moats of similar businesses. Fade rate = 72/half-life: 80 year half-life ~ 0.9% fade rate, 18 year half-life ~ 4% fade rate. - Research - Indirect information - Who owns the stock of X - Are they issuing equity or taking debt to finance operations? - When they are very bullish, debt is better. - Management focus - Operational efficiency (if it's sustainable, it's very good investment) - Growth strategy (expanding into markets where we have competitive advantage is good, otherwise maybe not) - Finances (cheap capital acquisition, smart capital allocation, return to shareholders what can't be used well) - HR (e.g. sustainable steady hiring) - Catalysts for situation improving in near future: otherwise current above market returns (from a business bought cheap) might get eroded. - Concentrate on the most useful information at each moment. More information is not necessarily better if the cost of collecting it is high. - Most researchers are trying to forecast change. Forecasting stability is simpler and is relatively uncrowded. - Risk management - Portfolio market price variance is a poor measure of risk. Better: buying everything significantly below intrinsic value. Generally thinking about intrinsic value rather than market price is better. - Diversification is good but it's better to have a portfolio of 30 bargain issues that don't depend on the same external factors than 1000 random stocks. - Insurance: anticorrelated assets, short sales, options.