When Not To Buy

“If price doesn’t scream at you as a bargain, it’s too close” ~ Warren Buffett

There are 2 types of investors who fail consistently:

1. Buying great companies at super valuations
2. Buying below average companies at cheap valuations

I don’t care what your investing strategy is, the only way to pick great companies is – Pick the Industry Leader, Period!

If a company is an industry leader, it is because they have something special than other businesses in the domain.

Now, the focus shifts on the industry. Ask these questions:

1. What is industry’s barriers to entry?
2. Is the industry an oligopoly or fragmented?
3. What’s the future of the industry in the next 10 years?
4. What is the bargaining power of the buyers?
5. Does the industry depend on other industries?
6. What the industry leader has, which makes it an industry leader?

Asking questions about the industry is easier than asking questions about companies.

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Talking about valuation, I prefer DCF (certainty equivalent cash flows) Valuation.

Calculate cash flows by,

1. Go to screener and choose your company.
2. Take “cash from operating activity”
3. Deduct “Fixed Assets Purchased” under Cash from Investing Activity head.
4. Deduct “Investing in Subsidiaries & Acquisitions”

The cost of capital is the risk free rate.

Be conservative while putting a growth rate on cash flows for next 10 years. Calculate the terminal value with cash flows of 11th year.

The value per share you get at last, put a 50% margin of safety on it! That’s your bargain.