Tutorial 71-75 Recap
1) PERMANENT LOSS OF CAPITAL - the Investment Masters seek to avoid the permanent loss of capital before seeking gains. Fluctuations in stock prices will always occur, but it is the permanent loss of capital that cannot be recovered. Typical contributors to permanent loss of capital include one or a combination of the following: paying too much for a stock, poor capital allocation, excessive indebtedness, overly cyclical businesses, technological obsolescence, value traps and fraud.
2) THE UNEXPECTED - the Investment Masters prepare for the unexpected. Sometimes investors incur losses due to a failure of imagination, they haven't considered events that may never have occurred before. The Investment Masters seek to build portfolios that will survive unexpected events by limiting exposure to corporate debt and leverage and limiting correlation and concentration risks in the portfolio.
3) LIQUIDITY - the Investment Masters understand that investment mistakes can be made or circumstances may change and liquidity is essential in exiting such positions. Having a portfolio full of illiquid stocks may force an investor to sell assets at an inopportune time. Furthermore, an investor maybe unable to sell assets at any price in a crisis. Liquidity tends to dry up when it's most needed.
4) CAPITAL ALLOCATION - the great 'Compounding Machines' have management who understand and execute appropriate capital management. Management can destroy capital and share prices by poor capital allocation decisions. Capital management is a key driver of future business returns if a significant proportion of a companies earnings are re-invested in the business.
5) MERGERS AND ACQUISITIONS - The Investment Masters understand the risks involved with M&A. The seller of a business knows more than the buyer. Be careful investing in businesses built on a strategy of acquisition. Be cautious of businesses acquiring new businesses outside their circle of competence. Management are often overly optimistic on the revenue and cost synergies M&A transactions will deliver. The track record of corporate M&A has very much favoured the seller of the business, not the buyer.