Hi Hardik – Short answers is bias, long answer below. Since you have asked my response on general thinking I have replied accordingly. I am happy to have discussion on investment thesis / antithesis as well once you get chance to read about company
Franchise Value – The True North in my investing framework
Over last 1.5 cycles of thinking, introspecting, 3 years of writing on this forum and interacting with other investors has helped me to sharpen my thoughts on my investment framework. It was always a “long term investing” since the beginning of my investment journey but contours of framework were pretty vague. Over the course, thinking evolved and I think today – it has reached to a point where I can document my framework more clearly than before without complicating too many things. Off-course – it will keep evolving but at this point of time this is what I have.
What to exploit
The beauty of stock market is multiple strategy can co-exist. The success lies in how effectively investor can execute the strategy well. Through long term investing – my attempt is to exploit what is not discounted 5 years ahead. I dont think – we can predict accounting profit growth after 5 years because not only accounting profits are cyclical but also it depends on account keeping practices of the company. Aggressive accounting keeping will always show faster growth than someone who is conservative in their practices. Therefore – thinking beyond 5 years need something which a) does not change that frequently and b) which is hard to manipulate.
Franchise value helps to address these issues for an investor who is having investing time horizon more than 5 years
What is Franchise Value
To put it simply according to me ‘Franchise’ enables organisation to earn ROE above cost of capital. Franchise value can be measured in multiple ways (1) Market cap – replacement value (2) ROE – cost of capital.
Franchise value – if identified correctly – takes care of point a) as franchise’s real worth does not change qoq, yoy. Competition has to sweat real hard to break in to good franchise. But it does not take care of point b) something which is hard to manipulate. Without naming any companies, current bull market has lot of companies where ROE/ ROCE is above COC but cash generation remains poor which can be attributed to aggressive P&L accounting. To address this issue of aggressive accounting, I consider additional criteria to ‘assess’ the the strength franchise – that is, does franchise “consistently” generate cash from its accounting profit
Therefore, In my opinion franchise value can act as a ‘True North’ to guide long term investors in their journey if they have understanding on – 1) what are the building blocks of the franchise 2) and what is durability is the franchise
When to Buy
I try to buy companies where I believe I have some understanding on the building blocks of the franchise and attributes which makes franchise durable. Investing is so wild and confusing that you need to have some markers which help you in your journey especially when the feedback loops are long. Therefore I have decided, in the first two – three cycles of my investment career I am planning to buy companies only where proof of solid franchise is in numbers. For me the proof of franchise lies in three numbers – ROCE, market share trend and cash generations. I am not interested in companies where franchise is not reflecting in numbers even though max IRR can be generated in cases where investor identifies emerging franchise which is not reflecting in numbers. That will be probably 3rd or 4th cycle onwards. ( “First two cycles wicket pe datte rehhna hai” )
When to Hold
Once you have some markers, life get easier to decide whether strength of franchise is improved or weaken or not changed. I will hold my investment till the time franchise is not broken. According to me – growth is easy to come back but franchise once broken is very difficult to come back
Incase of Suprajit, I would like to believe that franchise is not broken but in fact its strengthen
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