A few basic questions…: Part I
The following article is taken from “A few basic questions’ by Mr. Anand Sridharan who is an investor at Nalanda Capital.
In stormy seas, it’s good to revalidate what ones true North is. Investors can do this by asking themselves basic questions about how they think about investing & what that implies for how they should act now.
Each investor has an investment process that hopefully (a) gels with who they are, and (b) works over the long run. Revisiting principles of that process can help clear the mind in murky times and strengthen conviction to act on the implications of that process.
The author has listed some basic questions and what they mean to him to illustrate his process. Below are some of the questions whose answers would be different as each investor operates under different contexts, constraints, and preferences. What matters across everyone’s answers isn’t correctness but internal consistency.
What is one trying to do? The author intends to indefinitely own safe and good businesses purchased at reasonable valuations. To further elaborate on this, Safe means avoiding things that resemble bad people or bad neighborhoods or things investors can’t figure out. It is better to avoid than price big risks. Good is partly quantitative. The author’s primary metric is the return on capital. Over 20% for over five years is his rough bar. Investors should incline toward a business that has strengthened its competitive position within its industry. The qualitative part involves a construct where goodness is likely to sustain.
If the author is correct about safe and good, his consideration set is confined to enterprises that are above average. Purchasing goods at near-par or slightly above-par prices appears sensible. A relevant reference point for determining what is par is that the average business has historically been valued at a mid to high teens multiple of earnings over time. Valuation discipline is to avoid disastrous outcomes when investors are wrong or something unexpected happens.
What should one try not to do? Within what’s safe and good, the investors should not: 1. Pay any price just because they really like a business. 2. Wait for an unreasonably cheap price either.
Where does the current environment leave one on what to do and not do?
Everything’s fallen in price but a lot of it isn’t actionable. Bad businesses getting beaten down doesn’t help (e.g., bad bank below book). On the opposite end, 80 PE falling to 50 PE for a ‘great’ business doesn’t help one either. Valuations for the author’s consideration set are mostly ‘less outrageous but too high for his comfort’. In the middle, a (small) sweet spot of safe enough, good enough, reasonable enough is emerging.
Source: A Few Basic Questions from www.buggyhuman.substack.com By Anand Sridharan.
Asset Multiplier comments:
- Abiding by one’s own investment process in a disciplined way is the simplest way of wealth creation over time. Staying undaunted amidst noise and chaos is the key to remaining invested over the long term.
- Investors should be willing to pay a price that finds a balance between losing money and missing out on a good deal.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”