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Bettering circle of competence

January 10, 2013

Financial Businesses are my blind spots. I can’t visualize them. I can’t understand the difference between one financial business and another. However I am a little better with brick and mortar companies. To further add to the woes, the sector almost always is so mired in regulations that understanding the source of sustainable competitive advantage is a worthy edge in itself. On top of that, worthy literature on investment in financial stocks is few and far in between.

Thus for me, it had been a tough situation to understand the challenges, threats and opportunities in financial businesses. However recently I came across a few ideas to really have an insight into this sector of the economy. And I would suggest anyone wishing to improve his circle of competence to take up the following:

  • In US, the major financial companies which are public are- Goldman Sachs, Morgan Stanley,Wells Fargo etc. Dig up the 10-K and 8-K reports for one of their business cycles-here credit cycle and do thorough reading of them.
  • Give yourself a rest and try to write on the potential drivers of this business and how one should go about valuing it.Make sure you write it.
  • Google up Aswath Damodaran’s work on valuing financial stocks. That is the feedback on your understanding.
  • Take a rest, and write some more on your understanding. Reread Aswath Damodaran’s work again.
  • Google up famous investors logic on investment in companies in this business. Bruce Berkowitz’s interview to Outstanding Investors Digest in 1992 is a classic, so is Buffet’s article to OID titled “A security I like”. Read them multiple times.
  • Take a rest. Write again.
  • Now read the regulations of India: In this case- Economic Survey, RBI website and budget and white papers will be helpful. Google is your guide here.
  • Now read the annual reports of the big leaders in this space.

This is a long drawn out process. It will take time for the ideas to get cooked. For me as I understand, it will take about 2 years which is a good reasonable time to “have a grip” on the dynamics of this business and another 2 years of understanding and analysing it. Of course one may get a headjump if someone is there to hasten up the second installment of 2 years, but it will take atleast 2.

 

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One Comment leave one →
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