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They are inundated with Greek symbols, complicated mathematical equations, and esoteric arguments.
If you are already an investor, there is no more valuable chapter to read (and re-read) than chapter 23, “The Outside View.”
Instead, my actual investment will depend on factors like valuation, financial risk, management track record, capital allocation, customer concentration, market share, and so on.
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
We have rarely ever paid more than twenty times trailing PE. Most importantly, we have never said, “This is such a great business that even 30 PE is justified.”
Braun and Wirecard had been lying for years. But Braun’s hero worship was so deep and widespread in Germany that the national regulator, BaFin, filed a criminal complaint against Financial Times reporters in 2019, accusing them of market manipulation.
In my career spanning more than three decades, I have sat on the boards of more than two dozen companies ranging from a market value of $5 million to about $50 billion. At the beginning of every fiscal year, all these company management teams usually present their budgets for the year. And I don’t remember a single occasion when a management team hit its target. Let me repeat that: not a single occasion. I am not kidding. The businesses either exceeded their budgets or underperformed. And they had no way of knowing which would happen.
When Jeff Immelt, the CEO after Jack Welch, took over the plastics division at GE and found that the previous management had been fudging the profits, he chose to keep quiet.
In 2002, the Sarbanes–Oxley Act passed, and many accounting tricks being used by GE became illegal. Jack Welch had timed his retirement almost perfectly in 2001.
We base our assessment of a company on its riskiness, competitive moat, quality of financials, and management integrity—not on its ability to forecast earnings accurately.
Combined with Valeant’s numerous unethical business practices (e.g., raising the prices of life-saving drugs many times after acquiring them), he opined that Valeant would fail spectacularly sooner or later.
We do meet management teams. We use these meetings to build relationships and to understand their corporate history and some of their past decisions. We never use management meetings to build an investment case or test key hypotheses because we know we will hear what they want us to hear, not what we want to know.
No stories, no projections, just facts about the past.
When we find high-quality businesses that do not fundamentally alter their character over the long term, we should exploit the inevitable short-term fluctuations in their businesses for buying and not selling.
For us, the critical character traits of a high-quality business are stellar operating and financial track records, a stable industry, a high governance standard, a defensible moat, increasing market share, and low business and financial risk.
WNS’s annualized revenue growth of 64 percent from 2004 to 2007 was proof that it offered high-quality back-office processing services to its clients at competitive prices.
We bought aggressively and invested $41 million in early 2008 at an average price of $15.2 per share. By March 2022, the stock price ($85.5) had gained 462 percent, whereas the Indian indexes (the Sensex as well as the Midcap Index) had gained only 97 percent in dollars.
In June 2022, excluding purchases during the previous two years, we owned twenty-eight businesses. In one of these businesses, we made more than one hundred times our money (Page); in two of them, we multiplied our money more than twenty-five times (Berger and Ratnamani); and in six of them, we made more than ten times our money (in Indian rupees).
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)
He found that eleven of the seventeen species persisted unchanged for two to six million years, followed by a punctuational change over 160,000 years.
I am excluding industries in which “greatness” and “badness” haven’t had time to settle. These include areas like AI, space travel, autonomous vehicles, food delivery, WeWork clones, quantum computing, nanotechnology, and other sectors into which substantial venture capital investments are pouring.
For example, Asian Paints, 56; Colgate India, 43; Dabur, 44; Hindustan Unilever, 51; and Page Industries, 65.
Hence, we buy very rarely, and when we do, we buy a lot. So, having purchased these winners, given the stasis of their success, why should we sell?
Our investment strategy is thus quite simple: 1. Since the vast majority of businesses do not become great, our default strategy is not to buy. We are lazy buyers. 2. We buy only if we can find a high-quality business that can stay in stasis over decades. If we believe we have such a business, we don’t sell. We are very lazy sellers.
Throwing a dart at the business landscape will land us in real trouble. So we don’t. We invest rarely.
There is a tendency among investors to interpret stock price movement as the measure of business direction. Shouldn’t it be the other way around?
Until the business numbers (e.g., ROCE and free cash flow, not revenue growth) become attractive, we refuse to engage with companies, and EdTechs are no exception.
There is almost no business in our portfolio that we could buy at an absolute bottom, including the ones listed in table 9.3
This is a true story. Unfortunately, the twenty-four rabbits released by Mr. Austin in Australia in 1859 did produce ten billion rabbits by 1925 and wreaked havoc on the flora and fauna of the continent.
In December 2012, after four years of our owning Page, it had delivered 65 percent IRR (!).
As I wrote earlier, as of June 2022, out of our portfolio of twenty-four businesses (excluding the ones bought during the previous two years), we had multiplied our money by more than ten times in INR in nine (of these, the largest multiple, 82×, was for Page, and the smallest, 13×, was for Info Edge). In five of these nine, our holding period had been more than eleven years, and we had held the remaining ten-baggers for more than eight years.
But after we have invested, and if a business continues to do well, I become emotionally attached to it.
We bought Ratnamani for INR 128 per share from late 2010 to early 2011. The price did not move for the next three years, and in January 2014, the stock price was INR 135.
