Five criteria to tick for Quality

[Faramir]

Hi everyone
Maybe this post belongs to 'long/medium investing' section

Reading back page of AFR: Chanticleer section, dated Weekend 12-13 Apr. Five Criteria are listed:
1): Management Quality
2): Key Competitive Advantages
3): No Structural Deficiencies
4): Low Risk of Impairment
5): Good Continuity of Earnings

How does a beginner evaluate these five criteria.

1): Management: You either have to know someone who works in that company or know the person yourself. Do a google search and look at their online CVs?? Watch TV interviews and think WOW THIS GUY IS A GOOD BLOKE?? Would I believe CEO of QANTAS??? What is Management Quality?
Jackie Fairley, CEO of Starpharma gave a great interview last Thursday on ABC The Business Program. I did a google search on her and she has some amazing achievements. The only reason why I wouldn't invest is Staroharma makes a loss year in, year out. I a would not guess if their next set of trials will be successful or not in 4-6 months. Does this mean I need look at CVs of each CEO of each company I am watching?? Isn't a pretty face or a good bloke factor enough (Think Jodie Rich of One.Tel) HIH???????

2): Ability to beat competitors?? Different industries do easily or not easily provide that info. Coles vs Woolies, people just goto their nearest one. Both of them rip off suppliers and customers. I guess Analysis will give all of the answers. I cannot believe anyone can have a monopoly for long.

3): No structural deficiencies: what does this mean?? QANTAS not being foreign owned? Governments proposing changes to FBT for example, thus knocking down MMS shares last July?? Does this mean NAB being unable to sell off those poor UK businesses?? I don't understand this point

4): Low Risk of Impairment??? I really have no idea. If I was a Landlord of Twin Towers in New York. I thought that was a safe position until Sept 11, 2001. Am I on the right track?? Running a business that a Government decides to ban. Being the best candle making business on the eve of electric street lights???

5): Earnings: I am starting to read Half Yearly and Full Yearly reports. That only tells of past performances and we hope they will do better next time. This point was the easiest to understand.

It is a big ask to ask a beginner to understand and evaluate these 'simple' criteria.

Please help me, I am a beginner!!!!!!!

 

[Faramir]

I had a think about Point 3), is that the way a company does business, sell its services, eg David Jones and Myer coming on board internet shopping well after everyone else and still having a disaster with it. Is that like Westfields having no car parks so that it's customers won't go there because there is no parking?? Does poor customer service count as a structural defect??

 

[Smurf1976]

A few thoughts.

Management - If the same people have been running the company successfully for the past 10 years and nobody's about to retire then you could take it that they know what they are doing. That would be true even if none of them had any formal management qualifications etc - if they've done well for a decade then pretty clearly they've got some ability.

The risk arises when people at the top start leaving, especially if multiple people leave at once or if replacements are either inexperienced or have a dubious track record.

Competitive Advantages - The big question for me is how sustainable any advantage is?

Does it depend on something with natural limits (eg physical space, natural resources, size of the market if they already dominate it)? Or is it something that can be expanded greatly with no real limits?

And how easy is it for someone else to get into the same business with comparable efficiency?

Eg There's a huge barrier to entering the banking industry on a large scale and there's a huge barrier to building something like a toll road or large power station to compete with existing operators. In contrast, it's relatively easy to set up a retail outlet and then open more stores if it's successful. Likewise it's not overly difficult for someone to start a new company running tourist buses or to open a hotel.

Risk of impairment - If you own a pipeline or railway that transports only a specific product from the source to a single customer (or from a mine to a port) then your asset becomes completely worthless in the event that the customer no longer wants the product (eg they close or relocate) or the supplier stops production (inevitable at some point if they're simply mining a finite resource).

Another big risk is government. Eg taxis are one industry that is very much at risk of regulatory change. Late trading pubs and nightclubs are another one that, in NSW especially, has seen some impacts in recent times. And if government is a major (or the only) customer of the business then there's a huge risk there. Eg A company that operates bus services under contract to the state government in a defined area - there's nothing to stop the government itself buying some buses and employing drivers, indeed in most states that's actually been done in the past.

Anything relating to fashion is another one. Eg a chain of retail stores that sells specific products made by a single manufacturer. That's great until that manufacturer's products cease to be fashionable.

Having only a single, or a small number, of assets that are at risk of natural disasters, war etc is another one. Eg a small oil company that has its' entire operations in a country where civil war or the nationalisation of key industries is a distinct possibility could see their entire operations gone in an instant.

Another one is the size of the market itself especially if that market is declining. Obvious historical examples are things like making candles and whale oil lamps when gas lighting emerged. And gas lighting when electricity became popular. More recent examples would be things like selling records / tapes / CD's - most such retail outlets having already closed. Or renting DVD's. Or selling cigarettes. In anything like that, there's a real limit to the extent of growth from any one company when the market itself is disappearing.

 

[Faramir]

Thank you Smurf76. I really appreciate your insights.

Now I need to learn how to apply it to today's situations.

David Jones:
1): Management, not sure, have not investigated, assuming poor
2): Competitive Advantages, little due to online shopping
3): Structural problems include online shopping too late jumping on the band wagon, bad customer service, structural advantages include Prime CBD Real Estate
4): Impairment, risks include customers abandoning traditional shopping
5): Balance sheet, haven't look, must be bad if everyone is downgrading DJ

Can anyone else give me a typical example of today's business?

 

[burglar]

... Please help me, I am a beginner!!!!!!!

There is a spectrum from investor to trader to entrepreneur/gambler/prospector.

That of which you speak here is obviously relating to "value investing"!
(al la Warren Buffett, Benjamin Graham, Charlie Munger et al)

But have you yet decided which camp you wish to be in?
What is your aversion to risk?
How patient are you, do you want to grow rich slowly?

Many simpler things to tackle first.
Start with a mission statement.
How about:
"I want to outperform my everyday bank account interest!?"
#Or#
"I want to pay an obscene amount of tax."

 

[Faramir]

Thank you Burglar. I am very much influenced by value investing. I don't have much tolerance to risk. I am patience. That's not to say as I increase my knowledge that I will change 'camps'. My main goal is to undo my mistake of listening to that MLC Agent who advised me to invest in Horizon 4 back in Sept 2007. After GFC, much procrastination, much personal saving - I didn't lose much after 5 years but I was dumb enough to believe him when he said "Look after your business and parents, we'll look after your investment". Talk about being naive.

Now I want the responsibility of my own investment.

When I read those five criteria, it just went over my head and I wasn't' sure what the author was trying to say. That's why I posted this thread. It helped me understand that article.

Thank you for your advice.

 

[Wysiwyg]

Mate, I have checked out a fair few things over the years and this bloke could be right up your alley. https://www.skaffold.com/join/PRMNAV
You could compare the stock selections meet the criteria listed below. You can self learn or seek out people who have the experience under their belt.

 

[galumay]

Mate, I have checked out a fair few things over the years and this bloke could be right up your alley. https://www.skaffold.com/join/PRMNAV
You could compare the stock selections meet the criteria listed below. You can self learn or seek out people who have the experience under their belt.

Not sure that I would recommend Roger the Dodger Montgomery to somone interested in FA. Although one might well learn what not to do and why I guess. Reading his book, "Value Able" was enough to put me off.

I actually learned more here on ASF, than anywhere else. The good thing here is you get both points of view, I have learnt lots from the TA guys as well, even though its not my approach and it helps you question your judgements and opinions.

 

[burglar]

... Now I want the responsibility of my own investment ...

That is a good mission statement.

... I wasn't sure what the author was trying to say ...

Me neither, I agree with your comments.
How can you know if the management is good when it is their best interests to be opaque?
How can you tell if the balance sheet is strong when they use creative accountants?

But I can see the Share Price Action in real time ... no smoke, no mirrors, ...

... That's not to say as I increase my knowledge that I will change 'camps' ...

Not so much advice!
My point of view.

Where am I standing, which way am I looking?
I am near retirement age, gambling with penny dreads.
Always wanted to make huge & fast capital gains.
Wanted to plough profits into blue chips.

I have left it too late to get rich slowly.
I would recommend that to any newbie with time on their side.
Compounding is the easy path to financial independence.

Just my opinion.

 

[Faramir]

Thank you everyone. I admit that I am a fan of Roger Montgomery. There are quite a few ASF threads of him and Skaffold. I understand there is a diverse range of opinions of him. I do not think I want to spend money on his Skaffold Program. I have his book and I am trying to read it. I am actually spending more time reading stuff here. I am seeing debates, diverse opinions, etc.

Since joining ASF, I am starting to shy away from Roger even I respect the fact he is a successful investor and is well known. I am starting to look for more opinions rather than listen to those who appear in media. They are right when they say something. Only they are right a while back when they brought their stocks (before those stocks were either well known or were ramped up) and by the time they state those stocks on tv/radio, etc, it is too late. The buying opportunity maybe gone.

I was listening to an audio book "The Intelligent Investor" by Benjamin Graham. I will buy the actual book soon. I learn a few things just from listening to that book.

Back to the five criteria listed in this thread. At least it is a start for me. Thank you for your contributions.

 

[Ves]

Bruce Greenwald's work was very influential to me as a beginner.

For competitive advantage:

http://www.amazon.com/Competition-D...14475&sr=8-1&keywords=competition+demystified

On valuation and fundamental investing:

http://www.amazon.com/Value-Investi...id=1397514545&sr=8-1&keywords=greenwald+value

Also this thread is highly recommended, there is a fair bit of in-depth discussion about approach to long-term investments and some specifics on valuation, also some more Greenwald lecture videos linked in the first few pages:

https://www.aussiestockforums.com/forums/showthread.php?t=23385

 

[Faramir]

Thank you Ves

 

[ROE]

Easy for commentators to come up with these points but it is harder than a simple check list
it's not as easy as it sound but it is not rocket science either, it some where in between.

you really need to have a decent knowledge of the market and keep tab on business and management in order to have that list any use to you...

Most of the stuff they written is really hind insight and by the time it ticks all the boxes most good gain has already been factor into the price.

Learn the fundamental and build a strong foundation, once you gained enough experience you have your own list and know what to do, don't get too hang up on some article your list maybe a better one down the track

 

[systematic]

1): Management Quality
2): Key Competitive Advantages
3): No Structural Deficiencies
4): Low Risk of Impairment
5): Good Continuity of Earnings

How does a beginner evaluate these five criteria.

How does an investor of any amount of experience investor evaluate these criteria?!!!

I'm with you Faramir, and it's exactly why I prefer to take a 'systematic' or quantitative or numbers-based approach (call it whatever); i.e. (as I've said before...) I just don't think I'm that good.

The above criteria are (in my opinion) for those who, like Buffett, are able to (or fancy themselves able to) add real value/expertise to stock selection. i.e. They are that good. I prefer to 'bet' on the chance that I'm just not. So even when it comes to assessing quality, I prefer to just run some numbers and go with that. I wouldn't even know where to start with a list like the above with any confidence.

 

[Faramir]

Thank you ROE and systematic. I think most share prices is also about public perception. CEOs or commentators who are media 'darlings' can easy promote their companies and force a 'popularity' contest. Warren Buffett, etc can say in the 'long run it is a weighing machine' but I really think it is a popularity contest.

No company remains the same over long periods of time. The time CEOs, etc spend in their jobs are shorter. Also Term Deposits, interest rates is low that many people think that they have no alternative but to pump lots of money into stocks. I was tempted to put everything into stocks about 3 months ago. I just didn't have time to research. After buying two stocks with less than 15% of my savings spent, I realise how little I know. I am really struggling to find time to do decent research. I guess I really should concentrate on making and saving money in my small business and research/learn investing whenever I can. I should feel no need to rush, no need feeling that I have missed out, that I have missed ample opportunities. Missing out is better than making a dumb decision.

Thank you everyone for your contributions.

 

[luutzu]

Thank you ROE and systematic. I think most share prices is also about public perception. CEOs or commentators who are media 'darlings' can easy promote their companies and force a 'popularity' contest. Warren Buffett, etc can say in the 'long run it is a weighing machine' but I really think it is a popularity contest.

No company remains the same over long periods of time. The time CEOs, etc spend in their jobs are shorter. Also Term Deposits, interest rates is low that many people think that they have no alternative but to pump lots of money into stocks. I was tempted to put everything into stocks about 3 months ago. I just didn't have time to research. After buying two stocks with less than 15% of my savings spent, I realise how little I know. I am really struggling to find time to do decent research. I guess I really should concentrate on making and saving money in my small business and research/learn investing whenever I can. I should feel no need to rush, no need feeling that I have missed out, that I have missed ample opportunities. Missing out is better than making a dumb decision.

Thank you everyone for your contributions.

I think you've made the right decision.
When not sure, best to do what we're certain of. And investing in your own business instead of a public one we know little or nothing about is probably a better idea.

But if you got too much cash and no opportunities and want to put in to stocks but have little or no time... wiser men have advised to put into a low cost index fund. That way, your cash could earn with corporate Australia.. and over the long term, the Australian economy has done pretty well.. .chances are the future could be OK too.

With the stocks you've already purchased, probably use that as start to keep your interests in analysing businesses/stocks. I find it's easier to learn the hows and whys, to read up on things when my money's in it. When there's nothing in it right away, other work will take our time away.

 

[herzy]

But if you got too much cash and no opportunities and want to put in to stocks but have little or no time... wiser men have advised to put into a low cost index fund. That way, your cash could earn with corporate Australia.. and over the long term, the Australian economy has done pretty well.. .chances are the future could be OK too.

Lots of people (Warren Buffett included) have recommended this. Not a bad option, especially if you try to buy the dips etc.

One step up would be a managed fund like Contango, which I hold as a way of catching all the micro-chips I don't have time or expertise to research properly.

 

[Faramir]

Hi Ves

Thank you for suggesting this thread:
https://www.aussiestockforums.com/forums/showthread.php?t=23385

Yes, it's Craft's Present Value of Future Cash Flows. I only wished that he saw this thread but he was away at that time. I guess I am hoping for too much to wish Craft to come back and make a post here??? At least this thread so many other people that I soon discovered that are fantastic contributors.

When I worked out my criteria, I will quote them. If I tried to quote anything now, I will be just repeating what I read in a newspaper report or a forum.

Thank you to everyone who contributed. No I haven't an EFT yet. I am waiting for some big correction. I have 10 stocks instead. 2 of them are disasters. When I have time, I will another post about getting nowhere and what it does to my financially self esteem.