Process

 

Before any investment is made, the following questions needs to be answered.

  1. Management:  Is the company run by able and honest management ? Ability without integrity is decidedly more dangerous than integrity without ability. To answer the question, read shareholder letters, find how the management is compensated and see how stable the management has been.
  2. Business: Moat. Industry. Reinvestment potential. Capital intensity. Government intervention.
  3. Finances: Small leverage. Long term debt covenants.
  4. Valuation: FCF growth + dividend yield/share-buyback > 15%. Pay for good quality.

The company should have at least one of these (a) Great Management/above-par business, (b) Great business/average-management.

Company Management Value Financials Business Verdict
Letters Compensation Stability Moat Industry
CRMT (Oct’15) 5%
Rolls-Royce (Sep’15) 10%
Fiat (Sep’15) 5%
Seaworld (Sep’15) 2.5%
Iconix Brand (Sep’15) No
CBI (Sep’15) No
Mullen Group (Sep’15) Watch
Hunter Douglas (Sep’15) Watch
Colfax (Sep’15) Watch
  1. Don’t buy unless you feel that it is worth at least > 2 times the current price (in 5 years). This implies that some kind of valuation has to be performed.
  2. Don’t buy if you see threats to the business model of the company(cf. BestBuy, HP, Tesco — lost nearly 40% over a few years when the discounters like ALDI and LIDL were slowly eating away its market share).
  3. Don’t buy if the company has too much debt (Prosafe, NADL — lost more than 70% in a few months because of collapse in crude oil price from ca. $100 to $45. The debt made everything worse).
  4. Don’t buy if you can’t even describe the business in one sentence (ASPS, OCWN — lost 40% in a few weeks because of regulatory problems, meanwhile I had no idea about the value of the business).
  5. Don’t use options unless the company is worth at least 3 times the current price.
  6. Do not have more than 20 holdings.
  7. Do not go over 10% in any one position. Only go 10% in companies with strong competitive advantages (went over 10% in Posco — a company with arguably small competitive advantage).
  8. Write on this blog, a point-by-point summary of each stock, *before* starting a position.

Resources

[Insider Buys]
[David Rolfe] [Donald Yactman] [Glenn Greenberg] [Guy Spier] [Tweedy Browne]
[Howard Marks] [Mario Gabelli] [Martin Whitman] [Mason Hawkins] [Murray Stahl]
[Prem Watsa] [Robert Vinal] [Richard Cuniff] [Steven Romick] [Wally Weitz] [Warren Buffett]

Life Lessons

Sep, 2014 On Exchange Rates
Jul, 2013 On Character Flaws

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