It's fun to see so many value investors out there who tend to focus on a company's moat and its growth potential. I find it odd that the word 'moat' has become so prevalent now, it seems that many companies have a moat.
People forget that a moat has to be wide, with crocodiles and Arnold Schwarzenegger in it (and Justin Bieber).
Anyway, I write today to emphasize the need for a margin of safety if one wants to be called a value investor. A margin of safety dictates that in the face of a downturn, the business is capable of withstanding the slowdown/ shock and then, able to realise its potential value.
In good times, investors forget about the margin of safety and conveniently account for that in terms of the growth of the company; said company shall grow, and in face of growing cash flows, my investment becomes safer.
It's easy to see the global potential for air coolers vis-a-vis air conditioners, but air cooler manufacturers may not be able to hold on to pricing pressures.
Consumer good manufacturers will compete with each other in a growing pie of the African and Asian and Latam continents, but only the best will be victorious.
Sanjay Bakshi recently wrote about the beauty of quality companies and how some of them have managed to deliver returns to shareholders even if shares were purchased at seemingly high valuations in the past. But very simply, people are focusing on the winners and not the losers. One could pick a potential good quality company today, and buy it at a good price, only to see it becoming Dexter Shoes, facing regulatory issues, or management issues.
Good quality companies are difficult to determine, and even when one finds such a company, what price allows for a margin of safety? Does a Bajaj Auto at 16-19x and 40-50% payout qualify as a good company with an adequate margin of safety? I think so - it's one of those rare beautiful companies. But does that make it a good investment today?
A rising tide lifts all boats. It is time for caution and hold on to that life vest.
Am afraid of Canada, China and Japan.
People forget that a moat has to be wide, with crocodiles and Arnold Schwarzenegger in it (and Justin Bieber).
Anyway, I write today to emphasize the need for a margin of safety if one wants to be called a value investor. A margin of safety dictates that in the face of a downturn, the business is capable of withstanding the slowdown/ shock and then, able to realise its potential value.
In good times, investors forget about the margin of safety and conveniently account for that in terms of the growth of the company; said company shall grow, and in face of growing cash flows, my investment becomes safer.
It's easy to see the global potential for air coolers vis-a-vis air conditioners, but air cooler manufacturers may not be able to hold on to pricing pressures.
Consumer good manufacturers will compete with each other in a growing pie of the African and Asian and Latam continents, but only the best will be victorious.
Sanjay Bakshi recently wrote about the beauty of quality companies and how some of them have managed to deliver returns to shareholders even if shares were purchased at seemingly high valuations in the past. But very simply, people are focusing on the winners and not the losers. One could pick a potential good quality company today, and buy it at a good price, only to see it becoming Dexter Shoes, facing regulatory issues, or management issues.
Good quality companies are difficult to determine, and even when one finds such a company, what price allows for a margin of safety? Does a Bajaj Auto at 16-19x and 40-50% payout qualify as a good company with an adequate margin of safety? I think so - it's one of those rare beautiful companies. But does that make it a good investment today?
A rising tide lifts all boats. It is time for caution and hold on to that life vest.
Am afraid of Canada, China and Japan.
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