CategoryInvesting Philosophy

A Go/No Go decision

A

I was reading an interview (or maybe annual meeting transcript) of warren buffet sometime back and he was asked about the discount rate he uses in the DCF (discounted cash flow) calculations.

He indicated that he uses the long term treasury risk free rate. In addition, for him a decision to buy is really a go/No go decision. If he can understand the company, its economics and predict its future for 10 years or more, and if the value is screaming at him, he goes ahead. Otherwise he passes.

I have changed my decision process after reading the above comment because it makes sense for a small investor like me. If I can understand the economics of a company (which rules out a huge number as my circle of competence is small) and if the decision is a slam dunk , I go ahead and commit my money. Else I pass. Now that has resulted in my leaving a lot of companies which were close and later did very well in terms of stock price. But in the end I would rather be sure of my decision than tweak my DCF model, fiddle with my discount rate and build hypothetical assumptions of good growth and at the first downward blip , not have the confidence to hold on to the stock.

The above go/No go approach has resulted in my leaving out pharma companies, a lot of commodity companies etc. But then for a retail investor like me who needs a few good ideas a year and does not have to show a quarterly performance like a fund manager, why take the risk and the heart burn ?

Measuring the moat – framework for evaluating competitive advantage

M

found this article on Michael Mauboussin’s website. Absolutely fantastic article. Extremely helpful in developing a framework for evaluating a companies competitive advantage.
http://www.capatcolumbia.com/Articles/measuringthemoat.pdf

In addition , micheal has published this new article on the legg mason website. A must read !!

http://www.leggmason.com/funds/knowledge/mauboussin/Aver_and_Aversion.pdf

Investing based on odds …Does it work ?

I
In may i analysed roughly that the market was offering an investor roughly 10:1 odds based on discounting of the risks ( some real risks and some imaginary ).

So a 10:1 odds meant a 10 % downside and 90 % upside which was kind of a good risk : reward scenario. A investor ‘COULD’ make good money if he/she invested at that time. The key work is ‘COULD’ . Finally investing is a probabilistic exercise and one can never be sure.

That is why i get uncomfortable when some ‘experts’ predict market level. Well if they are so confident then they should put all their money in the market at the time of the forecast, make the money and retire. The truth is no one can be sure. One can only look at the odds and invest when the odds favor. Which means higher the odds , lower the chances of losing. But still that does not mean one will not lose. even a 10:1 odds means one can lose 10% of the time.

so how has the thesis worked out . with market at 5950 , it is a gain of 20 % since then. Obviously the odds are poorer now and hence chance to lose higher (unless one is ready to invest with a longer holding period )

in the end it is all about odds . Also when you look at investing this way , you invest against the crowd which is difficult but in the end more profitable

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