Investing Framework 2.0
Keeping Things Simple yet Robust, longggggg term!
Almost 2 years before, I had decided a long 28 item checklist as the Investment Framework (let us call it V1.0) which was more or less borrowed from the Holy Trinity of Buffett, Pabrai and Prof Bakshi. I realised that simplifying this further is important, especially to have stronger convictions, for holding Compounding Machines for 5-10 years of horizon to begin. The framework needs to give a Simple & Robust Pitch which can be used to explain a non-investor/ young adult. Only then holding these gems will give outperformance and multi bagger benefits.
Post reading two phenomenal books - What I Learned About Investing from Darwin & Where The Money Is - Value Investing In Digital World
I am introducing an updated version of the V1.0 (to myself :P) to constantly remind me WHY (tf) I bought a particular business -
Investing Framework 2.0 for Long Term Compounders - “WHY”
Where to Play
Big Opportunity: Is the company entering a large, growing market?
Proven Product Fit: Has the product been successful for over 3 years? (Number of stores, users, contracts, etc.)
Industry Structure: Does the industry setup allow the company to succeed? (Monopoly, duopoly, etc.)
How to Win
Moat: Does the company have a competitive advantage? (Network effect, brand, low costs, etc.)
Earning Power: Can the company raise prices without losing customers?
Revenue Growth: Is the company's revenue growing faster than the average economy growth rate (10-12% in India)?
Yield Probability
Valuation: Is it fairly priced to provide over 15% returns?
Trustworthy Management: Are the promoters reliable and of high quality? (Governance, compliance, source of funding)
Capital Allocation: Have the promoters made wise financial decisions in the past?
Pretty much from the above list gets satisfied by Sales Growth & RoCE (> 15%) Consistency looked over a longggg (5-10 years) perspective, with some Qualitative checks (from business understanding & reading everything available). The idea is to ignore the Noise and Quarterlies; and keep a tab on long term impacts so that the Compounding doesn’t get disturbed. After all, no-more than 1 or 2 stocks are going to fill in most of the criteria. All the Long Best !