When Not To Buy

For me, Valuation is the foremost parameter. If a company fails this parameter, then no matter how great it is fundamentally, I will not look at it. Just cannot accept the avoidable risk of multiple contraction plus low valuations would give margin of safety against unforeseen future circumstances.

I have Two Category of valuations depending on the type of business.

1. For non-moated businesses (average businesses) – BUY when price is at-least 25-30% Discount to Intrinsic Value calculated based on AVERAGE HISTORICAL EARNINGS (Avg ROCE, Avg EBIT margins etc.).
   This ensures that we have two tiers of margin of safety.
   One is the flat 30% discount Demanded on intrinsic value.
   Secondly, By using AVG Earnings power, we can buy when the earnings are on the lower side of the avg, thus giving a chance for reversion to mean (A very powerful and persuasive phenomenon) and also protecting on the downside against further earnings decline. (some basic business analysis is of-course required to figure out where in the cycle earnings are currently and what are the catalysts for mean reversion)

2. For Strong / Moated Businesses – Buy at Fair Value, usually 10-12 EBIT/EV Multiple, so that we get all the future growth + Multiple re-rating chance for free.Here numbers are of secondary concern and business analysis the primary. Significant judgement about business fundamentals, industry dynamics is required to determine the strength and sustainability of competitive advantages. Thus, if a company passes the business analysis test, then buying it at fair static intrinsic value would give us all the good things about growth without having to pay for it!