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Something for free

December 6, 2012

Financial media down somewhere between birth and maturity decided there are two paradigms of investing- value and growth. One where you bought a dollar worth of stuff with 50cents and the other where you paid not today’s earnings but tomorrows growth. So somewhere when value investing got squashed people decided to shift to growth and glamour. The transition is not quite clear to me but this is something I speculated it to be. Somewhere also down there, growth investing got replaced by the notion of senseless ideas like investing in IPOs or buying in stocks which has shown great growth in the past few 3 quarters but sank money in the preceding 30.

However, it will be more fruitful to think from a different paradigm. This follows directly from the idea of “Quality of Margin of Safety”. A business/company can have many aspects. If you think like a diamond curator, facets,a business has many facets. It can be its valuation, management, underlying business fundamentals, growth, return on invested capital, inventory turns etc. Furthermore, you need multiple lens, through which you will analyse it. It can be a catalyst pending, mental models and even “stress tests”(what if the growth halves tomorrow?)

These are not exhaustive items but just indicative. When one analyses one aspect much of the hidden facets remain unexplored. Thus preventing one to make a proper judgement on the requisite time period one should hold onto it, the threats one can meet along the way etc.

So while doing valuation exercise, one should ask: “What am I getting for free?” The answer will give one the desirability of the investment. One might choose to put the managerial skills and integrity far higher than growth. If so then its his/her choice and should thus stick to it. The question thus remains, not only what he gets for free, but also what is the quality of goods he is getting for free.

Didnt people say-“never look a gift’s horse in the mouth”

I guess they were just plain wrong!

5 Comments leave one →
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