"the number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage...You have to understand the odds and have the discipline to bet only when the odds are in your favor."
Charlie doesn't make a lot of investments. He stays within his circle of competence by applying a basic overall screen, designed to limit his investment field to only simple understandable candidates. Charlie looks for a dominant business franchise that can thrive in all market environments. Few companies survive this first cut. Investor favorites such as pharmaceuticals and technology, for example go straight to the "too tough pile." Heavily promoted deals and IPOs earn immediate "no's".
Those that do survive this first winnowing are subjected to the filters of Charlie's mental model approach. Charlie detests "placer mining" the process of sifting through piles of sand for specks of gold. Instead he applies the "Big Ideas from the big disciplines" to find the large unrecognized nuggets of gold that lie in plain sight on the ground. He takes into account all relevant aspects, both internal and external to the company and its industry.
His thoroughness, however, does not cause him to forget his overall "ecosystem" theme: sometimes the maximization or minimization of a single factor (notably specialization, as he likes to point out regarding Costco's discount warehouses) can make that single factor disproportionately important.
Charlie treats financial reports with skepticism. They are merely the beginning of the proper calculation of intrinsic value. Additional factors includes the current and prospective regulatory climate; state of labor, supplier and customer relations; potential impact of changes in technology; competitive strengths and vulnerabilities; pricing power; scalability; environmental issues; and hidden exposures. He is searching for those few risks that are understandable. Next he recasts all financial statement figures to fit his own view of reality, the actual free or owner's cash flow, inventory and other working capital assets, fixed assets, and frequently overstated intangible assets or goodwill.
Munger also completes an assessment of the true impact, current and future , of the cost of stock options, pension plans, and retiree medical benefits. he applies equal scrutiny to the liability side of the balance sheet. For example, he may view the float as an asset rather than an obligation. He assesses the management to see if they are "able, trustworhy, and owner-oriented." For example, how do they deploy cash? Do they allocate it intelligently on behalf of the owners, or do they overcompensate themselves, or pursue ego-oriented growth?
Above all, he attempts to assess competitive advantage in every respect-products, markets, trademarks, employees, distribution channels, societal trends and the durability of that advantage. Charlie refers to the competitive advantage as the moat. Munger and Buffett both focus on competitive destruction. Over their long business careers, they have learned sometimes painfully that few businesses survive over multiple generations. They strive to buy only those businesses that have a good chance to overcome those odds.
Finally, Charlie calculates the intrinsic value of the whole business taking into account potential dilution. His view point is that "a great business at a fair price is superior to a fair business at a great price." By the time he is finished with his analysis, he has reduced the candidate to its most salient elements and achieved a remarkable degree of confidence about whether or not to act. The evaluation, finally becomes not so much mathematical as philosophical. Ultimately "a feel" emerges.
Charlie doesn't make a lot of investments. He stays within his circle of competence by applying a basic overall screen, designed to limit his investment field to only simple understandable candidates. Charlie looks for a dominant business franchise that can thrive in all market environments. Few companies survive this first cut. Investor favorites such as pharmaceuticals and technology, for example go straight to the "too tough pile." Heavily promoted deals and IPOs earn immediate "no's".
Those that do survive this first winnowing are subjected to the filters of Charlie's mental model approach. Charlie detests "placer mining" the process of sifting through piles of sand for specks of gold. Instead he applies the "Big Ideas from the big disciplines" to find the large unrecognized nuggets of gold that lie in plain sight on the ground. He takes into account all relevant aspects, both internal and external to the company and its industry.
His thoroughness, however, does not cause him to forget his overall "ecosystem" theme: sometimes the maximization or minimization of a single factor (notably specialization, as he likes to point out regarding Costco's discount warehouses) can make that single factor disproportionately important.
Charlie treats financial reports with skepticism. They are merely the beginning of the proper calculation of intrinsic value. Additional factors includes the current and prospective regulatory climate; state of labor, supplier and customer relations; potential impact of changes in technology; competitive strengths and vulnerabilities; pricing power; scalability; environmental issues; and hidden exposures. He is searching for those few risks that are understandable. Next he recasts all financial statement figures to fit his own view of reality, the actual free or owner's cash flow, inventory and other working capital assets, fixed assets, and frequently overstated intangible assets or goodwill.
Munger also completes an assessment of the true impact, current and future , of the cost of stock options, pension plans, and retiree medical benefits. he applies equal scrutiny to the liability side of the balance sheet. For example, he may view the float as an asset rather than an obligation. He assesses the management to see if they are "able, trustworhy, and owner-oriented." For example, how do they deploy cash? Do they allocate it intelligently on behalf of the owners, or do they overcompensate themselves, or pursue ego-oriented growth?
Above all, he attempts to assess competitive advantage in every respect-products, markets, trademarks, employees, distribution channels, societal trends and the durability of that advantage. Charlie refers to the competitive advantage as the moat. Munger and Buffett both focus on competitive destruction. Over their long business careers, they have learned sometimes painfully that few businesses survive over multiple generations. They strive to buy only those businesses that have a good chance to overcome those odds.
Finally, Charlie calculates the intrinsic value of the whole business taking into account potential dilution. His view point is that "a great business at a fair price is superior to a fair business at a great price." By the time he is finished with his analysis, he has reduced the candidate to its most salient elements and achieved a remarkable degree of confidence about whether or not to act. The evaluation, finally becomes not so much mathematical as philosophical. Ultimately "a feel" emerges.
