In this report I provide a framework for categorizing businesses into 1 of 4 types. To determine what type of business a potential investment is, I suggest analyzing a business on 3 primary characteristics: 1) the return on invested capital of the business; 2) the potential for reinvestment in the business; 3) the capital intensity of the business.
By: Dan Erdle
Overview
The purpose of this post is to explore the many benefits of thinking and behaving differently. I also wish to explore why human nature makes it so difficult for us as investors to go against the crowd. I hope to get across the point that it is unrealistic to expect that if you think and behave like other investors that your results will be anything but average. In order to have superior investing results an investor must develop the ability to engage in independent, objective analysis free from the pull of conventional wisdom or popular thinking. Successful investors will also develop an ability to maintain a portfolio influenced by a high degree of contrarianism.
Understanding Price Declines
By: Dan Erdle
Overview
The purpose of this post is to remind ourselves how we should think about price declines, discuss common misconceptions around falling prices, and touch on specific actions we might take when met with declines. Above else, the key to understanding price declines, as well as taking the correct action in response to them, is understanding the difference between Price and Value. In dealing with this topic it is fundamental that we differentiate the two. We are concerned with Value. The rest of the world is obsessed with Price.
Investors love making bold forecasts of the future. The problem is that the investor’s success then hinges on their predictions coming to pass. Rather than attempting to predict a certain version of the future, investors should prepare for an uncertain future by seeking discounted valuations. By demanding a margin of safety, investors don’t limit themselves to only succeeding under predetermined circumstances. Investors should admit they are unlikely to correctly predict the complexities of the economy and focus on the things they can control such as the valuations they are willing to pay.
There are many misconceptions concerning “growth.” Growth has the ability to create tremendous value under the right circumstances, but the situation is much more complicated than most believe. Check out the PDF report below to see when growth creates value and when it does not.
The most important function of the leaders of a business is to determine how to allocate the company’s capital. Some managers are great stewards of shareholder funds and others squander large quantities of resources. This report on Capital Allocation takes a look at the various options managers have for deploying capital and the general framework that should be used for thinking about the use of shareholder money.
A company’s Return on Invested Capital is the primary driver of investor returns over the long run. Because of the intense competition of the free market, most businesses are unable to produce returns on capital above their cost of capital for extended periods of time. A company will only be able to sustain returns on invested capital above the cost of capital if the business has an economic “moat.” By understanding the link between Returns on Capital and economic moats investors can find great businesses for long term investing. If there is one thing investors should focus on it is the company’s sustainable Return on Invested Capital.
By: Dan Erdle
By and large, inventors take what should be a major positive—the availability of a liquid public market—and turn it in to one of their biggest detriments. They allow daily news headlines, as well as other people’s reactions to these news events, to drive their decision making. The fact that investors have access to daily price quotes, coupled with the natural human tendency to be dominated by their emotions, creates a terrible combination for investors. One consequence has been that the quick and easy ability to buy or sell investments has caused portfolio turnover to increase over time. Today even professional investors, who are supposed to make decisions with stable rationality, struggle to stick with their decisions for even a year.
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