Đạt Tiêu's Reviews > The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments

Little book yet very informative about economic moats. Some summary:

A. why moats?
-> overcome competition
-> durable competitive advantages

B. Moat traps
- Great products/services
- Great market share
- Good execution
- Good management
-> Not a moat

1. Intangible assets:
- Brands:
-> how businesses build brands? brands sustain a long time?
-> any special about that brand?
-> brands give businesses pricing power?

- Patents:
-> how many patents? have new patents regularly?
-> any special patents that are hard to copy?
-> businesses overcome legal challenges over patents?

- Regulatory licences:
-> businesses have authority approvals on something that's hard to get?

2. Consumer switching cost
-> businesses have large customer base.
-> does it cost customer something costly enough (not specificly in money term) to keep them switch for another supplier?

3. Network effect (special switching cost)
-> businesses working as intermediaries or brokers, connecting people together for some kind of services
-> have a large customer base so far
-> be one of the firsts to enter the field -> have advantages to build up a large network in the beginning

4. Cost advantages
- Cheaper processes:
-> low material cost, low labor cost, more efficient assembling

- Better location:
-> geographical monopoly due to location
-> be near more demands
-> easier to access the supply or to distribute products/services

- Unique assets
- Greater scale:
-> distribution scale: -> require big fixed cost -> eliminate small and medium competitors
-> manufacturing scale: -> require big fixed cost -> eliminate small and medium competitors
-> market niche: specific market, -> not large enough(low customer base) for many suppliers + -> cost resources to understand better

C. Re-assess moats in cases:
-> the affect of technology advance on businesses
-> businesses extensions, growth
-> changes in industry structure, new competitors entering, customer base fragment

D. Find moats:
- Some industries have more moats than others
- Moats are absolute, not relative
- Some moats are wide, some narrow
- Moats are more important than a star CEO
-> Check past records, use ROE, ROA, ROIC. See if those numbers are strong and consistent
-> If yes, find out the reasons: any moat involved? If yes, how strong it is?

E. Evaluate moats
- A company value worths all future cash that the it can generates
-> Free cash flow FCF (owner's earing) = Net Income from operating activities (Sales - Operating Expense) - Capital Expenditure
- 4 factors affect any business and need to considerate when value a business:
-> risk of materializing future cash flow: how likely it will come true
-> growth of future cash flow: how big it can be
-> return on captial: how much needs to invest
-> economic moats: how long business can generate that cash flow

F. Tools for valuation
- Intrinsic value: many models -> Discounted cash flow
- Price multiples:
-> Price-2-Sales (P/S):
different in each industry
-> Price-2-BookValue (P/B):
be careful with goodwill (should be subtracted from book value), intangible assets (hard to value),
take into account other economic moats as book value
-> Price-2-Earnings (P/E)
compare with other companies, the whole market or other benchmark like bond interest
take into account other financial stats like ROE, profit margins to see P/E is acceptable
do your own P/E calculation
-> Price-2-Free-CashFlow:
true picture about business health, less noise than earnings
take into account depreciation (because cash flow excludes it)
-> P/E-2-Growth(5 year EPS growth) PEG
take into account the affect of the 4 factors when comparing 2 companies PEG, not just PEG alone
- Yield
-> Cash return = (Free cash flow + net interest expense)/(Enterprise value)
Enterprise value = Market Cap + Long-term debt - Current asset (Cash)
-> Compare with some benchmarks to see if acceptable

G. when to sell
- when you realize you make a mistake -> try to overcome and cut loss
- when the business is getting worse -> some criteria that make you buy its stocks in the first place are going worse
- when find some place much better to invest in -> take into account switching cost
- when some stocks take a big part of your portfolio -> consider risk tolerance -> diversify to minimize risks

H. Final words:
- Expand mental database of companies -> practice to see patterns, themes, make comparisons
- Seek successful investors tips and advice