Tutorial 81-85 Recap
1) WIN-WIN - businesses which have positive relations with their staff, their customers and suppliers and add value to society are more sustainable over the long term. Investing in businesses which take advantage of one or a combination of these groups is unlikely to be an investment winner.
2) THINKING ABOUT COMMODITY COMPANIES - you need to be particularly careful investing in companies exposed to commodity products. In a commodity industry, the lowest cost producers have the best chance for success over a cycle. Mixing too much debt with cyclical earnings is a recipe for disaster. A lack of pricing power ordinarily means cost savings are transferred to the companies customers. Many Investment Masters avoid cyclical companies given the inherent difficulty in obtaining a margin of safety.
3) QUALITY BUSINESSES - quality business are able to grow intrinsic value over time and generally have characteristics such as a strong moat, reasonable pricing power, high returns on capital, solid reinvestment opportunities, low capital intensity and good management. A large runway for sales growth, potential network effects and operating leverage are examples of other attributes that can enhance a companies earnings potential. Once you have identified a quality business it's important not to overpay.
4) GONNA CHANGE THE WORLD - while new industries may have enormous potential to change the world, history is littered with investors who lost money investing in these new wonders. Enormous potential does not equate with enormous returns. Ordinarily an influx of capital into a new industry destroys investor returns.
5) INVERT, ALWAYS INVERT - inverting the critical questions during the investment analysis can shed light on opportunities and risks. For example, instead of asking "how will I make money in this investment?" ask "what are the factors that could lead me to lose money in this investment?"