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Avoid big risks. 2. Buy high quality at a fair price. 3. Don’t be lazy—be very lazy.
they avoid taking risks to their life and well-being at the cost of giving up some potentially juicy opportunities.
Avoid big risks. Don’t make type I errors. Don’t commit to an investment in which the probability of losing money is higher than the probability of making money. Think about risk first, not return.
We at Nalanda never bring stock price volatility into a risk discussion. We define “risk” as the probability of capital loss.
There are very few good investments in the market.
Buffett is the best investor in the world because he is the best rejector in the world.
First, government-owned businesses. Unlike the Western world, India has a large number of publicly traded government-owned companies.
The second category of owners we avoid religiously is the listed subsidiaries of global giants.
the first and probably most important step in reimagining investing is to learn how not to invest.
An economic franchise arises from a product or service that (1) is needed or desired; (2) is thought by its customers to have no close substitute; and (3) is not subject to price regulation.
Moreover, franchises can tolerate mismanagement. Inept managers may diminish a franchise’s profitability, but they cannot inflict mortal damage.
“The right method of investment is to put fairly large sums of money into enterprises one thinks one knows something about.”
We ignore all proximate causes when analyzing businesses. We focus exclusively on the business fundamentals, or the ultimate causes of the success or failure of businesses.
We prefer demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations). Warren Buffett,
If the company management can’t forecast correctly, how can investors do so? They can’t. More importantly, they shouldn’t try.
However, concentrating on the past does have two main downsides. We may wrongly assume that (1) a historically successful business will continue to be so, or (2) a failed or failing business will continue to be so.
A report from the International Air Transport Association shows that from 2000 to 2014, the industry had not earned its cost of capital for fifteen years in a row.13 Not even in a single year!
U.S. airlines do not make money. 2. The global airline industry does not make money. 3. The top ten airlines in the world do not make money.
One of our principles of convergence investing is that if the industry allows its companies to make money consistently, we love it; if not, we better have a perfect reason for spending even one minute analyzing a business like an airline. Life is too short.
Industries like telecom towers, garment manufacturing, and commodity chemicals are notorious value destroyers.
Our portfolio is full of companies in desirable industries: enzymes, paints, cookers, business process outsourcing, bearings, compressors, consumer electricals, sanitaryware, and steam turbines, to name just a few.
As a quick reminder, I highlighted six types of businesses we avoid at all costs: 1. Those owned and run by crooks 2. Turnaround situations 3. Those with high levels of debt 4. M&A junkies 5. Those in fast-changing industries 6. Those with unaligned owners
The odds are that many investors think they are good at judging people, but they generally aren’t.
We sell under the following three conditions (the numbers in parentheses indicate the number of businesses sold): 1. A decline in governance standards (0) 2. Egregiously wrong capital allocation (3) 3. Irreparable damage to the business (6)
Contrary to the expectations of Darwinism, evolution can be faster when measured over shorter periods and slower over longer periods.
High-quality businesses, too, seem to undergo many changes when measured over days or weeks or months but are much more stable when the period of measurement is years or decades.
We have sold only when there had been an egregiously bad capital allocation or irreparable damage to a business.
(1) Since the 1990s, in over three-quarters of U.S. industries, the market share of the leading players has increased, and (2) these companies show higher profit margins and provide higher returns to shareholders, which, in turn, allows them to increase their market power even more.
What is needed to become a successful investor is not intellect, a commodity, but patience, which is not.
Davis outlined his three criteria for selecting the stock of an insurer: (1) The insurer had to be profitable, (2) its assets (bonds, mortgages, stocks) needed to be of the highest quality, and (3) its market price had to be lower than its private market value.
