@theintelligentinvestor @marginofsafety @ThumbTackInvestor @jeremyowtaip
Thoughts on this?
Harvard Business School professor Michael Porter has influenced generations of MBAs and world-famous value investors. But could his investing ideas be wrong?
@losemoneyinvestor: one of your fav prof and book leh
Reply to @losemoneyinvestor : notwithstanding what I said there are more than one methods to investing. So everyone is different lah. haha
I think each method has its place in value investing. And most value investors are likely doing both. Even Buffett admitted he is 85% Graham and 15% Fisher. I think he is probably part of the two plus Munger.
Apple has one of the strongest competitive advantage now and if you have spotted that 20 years ago, you would have been rewarded handsomely by holding its stock to now. Same as Microsoft, Amazon, Berkshire, Disney etc. So, not sure why the article is saying that "profit margins have no predictive power in the stock market". But moats are not easy to detect before they become moats. And when they become apparent, the price is not cheap, which I think has trapped many into buying high.
Net-Net investing is easier but it is not risk free either. Often there are real reasons behind why some stocks are trading at such low levels, which you might not know just from reading the annual reports. It also doesn't go well during market turmoil. Holding a bunch of cigar butts can be quite nerve-racking when market is free falling.
I would ask why not include both when selecting stocks?
Reply to @theintelligentinvestor : I feel better to hold MSFT than Apple. Apple is slowing losing out its innovation despite raising its revenue and dividend as cash cow company.
When I came across Michael Porter's work Competitive Advantage, I can see where he was coming from when he described the Five Forces he thought about which affect the competitive advantage of players in an industry. I finally seen enlightenment that there was a more concrete way we could look at competitive advantage. I was reflecting too that there were other ways of looking at a company such as doing a SWOT analysis which may not be exhaustive but provides some analysis to what one views as strengths, weaknesses, opportunities and threats. I can see that no matter how one looks at the industry that a business operates in and the business itself and compares it against other competition in finding out how strong a moat or competitive advantage it has, one will never be perfectly complete and perfectly confident how the future may hold for the business. This is simply because there are so many factors which affect the future of a business, it's competitive advantage. Or should I also drop in there are also unforeseen factors and circumstances which could affect the future fate of a business and also it's share price.
As such, I will put it as Michael Porter's work on Competitive Advantage has it's place as a useful framework of thinking on assessing competitive advantage of various players in an industry, bargaining power of sellers, bargaining power of buyers, threat of new entrants, intense rivalry among competitors, potential substitute of existing products or services. But, it is not the end all or holy grail to assessing competitive advantage as the business world is far more complex than being able to box it up into any framework.
Therefore, his work provides a foundational framework and certainly one does not end there but should apply what works from there and integrate with new knowledge and observation. SWOT analysis also is not the end all best exhaustive way to go about analysing the competitive advantage of a business. There is also no single holy grail way of doing successful investing. Some people love cigar butts while others love growth compounders irregardless of whether which types is easier to catch than the other.
I believe the only holy grail which makes sound investing which can provide reasonable long term returns is constant good money management and good portfolio construction and diversification (which include position sizings). Whether one is a good stock picker at identifying good cigar butts or compounders is not the most important factor. Good money management and good portfolio construction and diversification will help to protect against the unforeseen (and we got to admit no one is a prophet when it comes to investing) when it comes to placing an opinion on the future fate of stocks one has picked. Thus, this will help to protect against price volatility risk due to market trading sentiments, systematic risk due to changing macroeconomic trends and also systemic risk due to company specific risks all of which can affect the value of one's investment portfolio.
Reply to @jeremyowtaip : Thanks for sharing your thoughts, I'll have to spend some time reflecting to see if I can find some way to improve my investment from all these points.
This seems to be the topic on moat investing vs cigar butt investing, I have no doubt that the former is better way of investing but I’m biased towards the latter and here’s why: Investing to me is about getting more value than what I paid for, figure out what is the minimum value of a company and pay lesser than that. Pretty straightforward.
When it comes to cigar butts, it’s not difficult to find pricing that’s so cheap it makes absolutely no sense. Net-nets and profitable companies trading for less than net cash comes to mind. I believe Howard Marks said something along the likes of all bets make sense at the right pricing. That’s no different from bookmakers when they are setting odds and insurers when they are pricing their policies.
It’s way harder when it comes to looking for compounders. Mainly because most of the time those companies aren’t priced cheaply. So you have to be more certain about the value of the company moving forward, so there’s far less MOS. It’s one thing to look at successful examples from Buffett and conclude that of course those companies did well. They had this and that blah blah. It’s another to figure out whether a company one perceives to have a moat in the present will continue to maintain its edge in the future.
I believe Munger said that even the companies that Fisher picked didn’t “last forever”. Most of them fell out of the limelight due to one reason or another. Here’s two challenges: Whenever someone asks for an example of a company with a moat, give an example that Buffett/Munger have never mentioned before. Whenever someone asks for an example of a successful moat investor, don’t say Buffett/Munger. And try not to give repeated examples. Give it a shot and see how it goes.
To sum it up, I prefer the Graham/Schloss approach as it is far easier to execute. There’s no prize for degree of difficulty. You get awarded for being right and for me it’s easier when dealing with cigar butts than attempting to find the next compounder.
Reply to @Simpleinvestorsg : Yup seen that article as well. Seems like he lost his passion for security analysis in his later years. Not a fan of simply buying off a screener though.
Stuff shown on a screener might not be accurate, which can be partly mitigated by buying 100s of stocks but what happens when a huge chunk of them are those shady Chinese companies? I don't think I can just close my eyes and buy them LOL.
I think what I'm doing is pretty simple actually. Buying stuff less than net cash, liquidation value etc. Couldn't get simpler than that IMO. It gets real tough however, when you are trying to do what Fisher was doing though. I respect that but it's just not for me haha.
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