Poie100,Apologies, I missed your earlier post.You write: "It...

Poie100,

Apologies, I missed your earlier post.

You write:

"It seems to me that you use several scenarios to review/value companies?
Also, would you recommend any courses that would help?”


You are right, I do try to evaluated a range of scenarios, or possible outcomes for each business I look at buying. The main reason I do this is because it gives me a “feel” for the sort of share price upside, and the potential share price downside, i.e., I find it helps me manage risk when it comes to investing.

The other thing that I’ve learnt over the years is that no company is the same; each one has its own unique operational quirks and financial pedigree idiosyncrasies... which means that there is not one universal valuation measure that can be applied to all stocks, I don’t believe. Each has to be studied on its own merits.

For these reasons, I believe quite firmly that there is no course you can attend in order to be “taught the formula for successful value investing”.
I’m afraid the only way I know it to have been learnt is through cold, hard experience... which is what I observe is how all the legendary value investors – like the ones who make up Gralynchett’s name – became to hone their skills.

And along the road of experience, you are going to make mistakes, which is how you learn. In fact, you’ll never stop getting things wrong.
The think to ensure is that when you make mistakes they don’t end up blowing you up.


However, there are some common and base rules that you will find in the various value investing textbooks you might read, and these are very important guiding lights; things like:

1. You can only value businesses that generate free cash flow (defined as Operating Cash Flow less Stay-in-Business capital expenditure).

2. Avoid companies which cannot be the architect of its own destiny (financial, strategic, operational).

3. If you don’t understand a business, or don’t understand how it makes its profits, don’t invest in it.

4. Unless there is compelling reason to do so, avoid companies with excessive debt.

5. Read annual reports from cover to cover. They contain a wealth of information and proxy clues for investors. If you don’t understand something, ask someone who you think will know.

6. Never, ever act on the recommendations of stock broking analysts or financial advisors. Their interests are misaligned with yours

7. Find yourself a mentor, if possible. Learn from him/her, but don’t blindly do what he/she says.


I was lucky enough to “learn” value investing from two or three really good guys (note: they were reasonably smart, but they weren’t intellectual giants. Just regular guys. But what they were was patient and disciplined).

I summarise my learnings from these guys into the following criteria, which is how I evaluate investment opportunities:


BUSINESS PEDIGREE (and all the things that this encompasses), such as:

a. Brand recognition/Differentiated service offering
b. Commercial/economic “moat”
c. Operating margins
d. Capital intensity
e. Financial track record
f. Stability of earnings
g. Surplus capital generating ability
h. Balance sheet robustness
i. Underlying organic growth rates
j. Investment in R&D/Brand


INDUSTRY STRUCTURE:

a. Market position/Brand resonance
b. Competitive landscape
c. Supplier dominance or dependency
d. Scope of technological obsolescence
e. Difficulty or ease to replicate the business
f. Regulatory risks


MANAGEMENT COMPETENCE AND ALIGNMENT WITH SHAREHOLDER

a. Board composition and skillset
b. Track record of shareholder value creation
c. Remuneration structures and alignment of senior management with shareholders


QUALITY OF FINANCIAL STATEMENTS

a. Conservativeness with which accounts are presented
b. Appropriate revenue recognition
c. Extent of capitalisation of operating expenses and/or interest
d. Conservative depreciation policies
e. Reconciliation of Cash Flow Statement with Income Statement
f. Nature of Non-Recurring Items
g. Profits/losses recorded on asset sales
h. Debtor provisions and arrangements
i. Quality of inventory
j. Adequate and appropriate levels of provisioning
k. Related party arrangements and transactions
l. Contingent liabilities
m. History of asset write-downs


Cam