almanack
Investment notes
Basics
What is investment.
- Benjamin Graham: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative”
- One needs to have a security margin and analyse the investment to be sure that it is capable of returning the principle.
- Long-term investments means that stocks shouldn’t be rotated too often.
- We are incentivised to buy and sell often because financial intermediaries earn fees for every transaction, so they want to maximise it (worth considering as one invests).
Speculators v.s. Investors
- Investors should understand the intrinsic value of a company (e.g. by analysing the present discounted cash flows).
- Companies will make money in the future to investors. The goal of investments is to understand if the price of the company in the market is below its real value (Analogy with the 50 euros bill: it could be priced 70 or 30. Speculators would buy as long as they think it will go up, but investors would analyse the real price –50– and only buy if the price is below that).\
- Investors prevent losses (this is key and something that we don’t usually do).
- Investors focus on the difference between value and price
- The result of an investment are dividends, buy back of stocks, interest payments, reinvestments.
- Metals and Crypto are speculation not investments because you can’t analyse their intrinsic value.
Simple and Compound interest
n = time period
r = interest rate
# Simple interest
Final Capital = Initial Capital * (1 + n*r)
# Compound interest
Final Capital = Initial Capital (1 + i) ^ n
- The 72 Rule: If you get an interest rate of x% you can compute the amount of time required to double your capital by doing
72 / interest rate
Opportunity cost
- Every time you make a big expense, one should think if this is the best use of the money compared to the second best option (like investing it). Is this offering you the life improvements that you were looking for?
- This is why investors sometimes are considered “frugal”, in every decision they consdier their opportunity cost.
- Compute future value of money.
- Considering n as the interest from the investment.
Future value = Present value * (1 + i) ^ 5
- Considering n as the interest from the investment.
- This is the future value that should be considered for every investment.
- The minimum interest rate that should be considered for stock investments is of 9% (considering inflation values and risks). ```
- Compute future value
- Considering n as the inflation rate
Present Value = Future value / (1 + i) ^ n
- Considering n as the inflation rate
- Expected return on capital considering the initial and final values to understand the opportunity costs.
i = (( Final value / Present value ) ^ (1/n)) - 1
Expected profit and black swans
- If you analyse historical returns of stock markets, you’ll realise that they don’t behave exactly as a Gaussian as expected in the efficient market theory, but that the left (negative) tails of the Gaussian are heavier, meaning that black swans are likely to occur pushing more negative returns in the short-term. These tend to be compensated with slightly higher returns in the average of the curve.
- This is why for long-term investors black swans are an opportunity.
- Long-term investors focus on the difference between prices and intrinsic value. Not every investor is rational.
Risk and how to minimise it.
- Diversify (to minimise volatility).
- Diversify in markets, asset allocation, investment philosophies –value, growth, etc.– …
- Buy with a security margin.
- Focus on your circle of competence
- Understand what are your limits.
- Focus first on the companies that you’ve used extensively, and the sector that you work or that you know well.
- It’s all about patience.
- Find opportunities when the market is full of fear, and stay vigilant when there’s euphoria in the market.
Note: Focus your portfolio with a percentage following the index, and the rest in a small number of good bets to enhance the expected return.
Note: Keep the thesis for the companies and markets that I want to invest with the target price and wait for the crash to invest when the prices go down.
Financial Planning
One should always have 1-year of emergency fund in (strict) liquidity before investing to protect themselves against crisis and unexpected situations.
- That way you will not need to liquidate your investment in the worst possible case (which is potentially when you’ll need it).
- Financial planning is all about defining your investor profile (in terms of risks), and your investment goals.
- In my case I am a long-term investor that is able to handle risk well (crypto, you know?). And the goals I am after by investing are: financial freedom, safety, and knowledge
- Depending on your age your investment goals and asset allocation may (and will) change.
When in retirement, or at the end of your investment life, it would be good to not liquidate over a 3% of your total assets to prevent from harming the effects of compound interest.
- Always teach financial education to your kids. Give them the tools to protect their net worth, and grow it.
- If you end up leaving them with some assets, this will ensure that they know how to handle them and grow them.
Personal Balance Sheet
- Asset: What you have
- Liabilities: What you owe (debt)
-
Net Worth: The final balance (savings)
- Liabilities are used to finance the assets
- It may be useful to understand the short-term and long-term liabilities to understand the balance. ``` Example: Assets == Cash = 2000 Car = 8000 Home = 150000 Investment = 10000
Liabilities
Mortgage = 80000
Net Worth
Net Worth = 61000
- To understand the savings and cash flow of the house. The savings go immediately to net worth
Income — Expenses — Savings ——> Net worth.
- Savings should be invested to profit yourself and protect against inflation (i.e. economical freedom)
> Your saving rates should be ideally >20% of your income.
- The Free Cash Flow is the liquidity that you have available after all your expenses.
- Assets should be productive. Try to avoid unproductive assets.
- Your own house could be considered a toxic asset because it doesn't make profit and its value may go down.
- Focus on profitable assets and increase your income.
### Financial Instruments
- Bank deposits
- Guaranteed funds: Investment funds that ensure a specific rate.
- High fees
- Saving insurances: Guaranteed rate, but is low.
- Public debt (government debt)
- Corporate debt: Higher rate than public debt
- Index funds and ETF is a good way to access corporate debt
- Mixed investment funds
- Equity investment funds
- Stocks
- In many cases it may be better than investing in investment funds and you can minimise the risk if you have analyse the stocks you invest in (through the price/intrinsic value of the stock security margin)
- Commodities
- Usually through investment funds
### Savings
> Pay yourself first. - Kiyosaky
> To become rich there are only to things: work and savings. - Benjamin Franklin
- Credit expansions impact your savings (in the current economic model).
### Credit expansion v.s. true savings
- What happens when there is a credit expansion?
1. Increases the price of the source production factors.
- Prices increase closer to the consumer and therefore reduce the incentive of being farther from it.
- Companies can use credit to finance them.
2. Consumer product prices increase because the demand increases.
- Artificial profits on consumer corporations because it is financed by credits and people don't buy only what they need.
3. Increase the price on consumer products but salaries and productive factors do not increase.
- Worker productivity is not rewarded when there are credit expansions
- Consumer corporations like Amazon,
4. Ricardo effect.
- "Salaries should be estimated through their real value, i.e. the amount of work and capital used to produce them, not by their nominal value in coats, hats or money"
- Consumer products and assets increase their prices while salaries do not increase as much.
- Businessmen are incentivised to hire cheap labour.
5. Interest rates go up.
- Reverted after the crisis.
- With high rates there is a fight for liquidity among the economic agents.
6. Losses on corporations that are farther from the consumer (e.g. commodities, industry, etc.)
- They are really leveraged and they can't refinance their debt.
- Credit expansions only incentivise first-order products because there is short-term thinking. There is no investment in productivity boots (through machinery, investing on improvements, etc.).
> Book recommendations:
> - "Dinero, credito bancario y ciclos económicos" - Huerta de Soto
> - "Big Debt Crisis" - Ray Dalio
> - "How countries go broke - Ray Dalio"
> - First chapter: https://www.linkedin.com/pulse/how-countries-go-broke-introduction-chapter-one-ray-dalio-3wjae/
- Financing your own personal assets through credit expansion makes you vulnerable to the macroeconomic landscape and the economic cycle.
- Buying assets through savings can shield you against this effect (to some extent)
- An excess of leverage is risky.
> Do not get debt for non-lasting products (cars, houses that only produce losses, luxury, travelling, etc.)
> Invest on day 1 of the month to pay yourself first (your savings first)
## Economic foundations
- Corporations are entities that arbitrate with scarcity.
- They take low-value assets and commodities, and transform them into high-value consumer products that are fulfilling a need.
- Analysing demand and supply elasticity is key to understand how a product (or company) can be impacted by the different economic cycles and consumer behaviors.
- It is important to understand that corporations do not determine the price of their products depending on their costs. __Generally, they try to adjust their costs according to the price they can ask for their product__.
- On top of this, buyers will determine the intrinsic value (and utility) that this product brings them (that should be higher than their price for the product to be bought)
### Lifecycle of technological product
- Ideally, one should invest when some technology has just crossed the chasm and the pragmatists are starting to use it.
- Many people have made themselves rich investing in companies that haven't yet crossed the chasm (generally startups), but one incurs in way more risk.
### Natural and legislative monopolies
- Natural monopolies are great investments (as long as there is no regulation cutting their wings).
- Generally these monopolies are achieved through innovation, technology, know-how, and business disruption.
- This monopolies foster the competition from other players that want to disrupt the current big players.
- Legislative monopolies require the state to continue their status and they are not as efficient and innovative (as there is no competition).
### Macroeoconomic indicators
- Economic cycles shouldn't be studied through debt, but the liquidity in the system.
- Liquidity determines if debt can be paid with current cash flows.
- Main macroeconomic indicators: These are useful to understand the environment (and country) where we are investing:
- Credit supply
- Central bank balance (expansive or restrictive policy)
- Long-term or short-term debt given to governments and banks.
- Balance of commercial banks.
- Are new bank reserves being created and money being issued?
- Bank reserve rates.
- There are webs that allow you to inspect this.
- Credit demand
- Demand for credits from families and corporations.
- Percentage of mortgages costs for families.
- Late payments and defaults.
- Interest rate
- Long-term and short-term interest rate.
- The rate curve, and understand if it has been inverted.
- Arbitrage is possible when the rate from the short-term and the long-term is really close.
- The interest rate should be higher always in the long-term.
- The inversion of the curve happens when there is an extreme search of liquidity by all economic agents.
- The interest rate should also be increasing (if not something weird is happening).
- What is the different between public and private debt.
- Activity and expectations
- GDP
- Expenses in construction
- Retail sales
- Industrial incomes
- And any other metric that is related to the economic activity of a country or a region.
- Employment: It gives some insights about the health of the economy
- Unemployment rate
- Employment costs for companies.
- Rate of occupation.
- Salaries increases.
- Price and costs (CPI)
- Inflation rate or deflation
- Price per square meter.
- Case Schiller index and GDP
- Index marketcap and prices, PER, EV/EBITDA multiples, asset prices, etc.
- Stocks evolution
- External balances (exchange rates, etc.)
- Imports and exports.
- Exchange and currency rates.
- External balance.
- Public/State finances
- State budgets.
- Regulation security. Market freedom.
- Total debt of the state
### Economic cycle
> Understood through the degradation of liquidity (Juan Ramón Rallo)
- Boom (liquidity degradation): Less liquidity by agents.
- A lot of mortgages and credit. A lot of long-term leverage.
- Cheap debt leads to a lot of credit and more long-term debt.
- Unemployment close to zero.
- Prices go up and lasting assets increase their price.
- Individuals are reckless and start making a lot of bad decisions.
- Crisis (fight for liquidity): Less liquidity supply.
- From boom to depression. They fight for debt. Banks harm their balances and is full or risk and they have to limit their leverage.
- Debt is given to people that are more risky (everyone else may have debt).
- Interest rates in the short-term go up and there is an inversion.
- GDP is still high, but expectations start going up.
- Unemployment starts raising at industries farther from consumers.
- Prices don't go up as much.
- In this stage people do not yet realise that a crisis is coming and there may be a problem coming.
- Liquidation (depression): The actual crisis, with defaults, unemployment, etc.
- The actual crisis.
- Refinance and deleverage. This leads to the sell-off of many assets to get liquidity.
- The debt supply goes down and there are a lot of defaults, and banks balances are really impacted (and dome may die).
- Savings start going up in order to deleverage.
- Unemployment go up.
- Interest rates go down because the demand for liquidity goes down.
- This is why liquidity is useful in this stage.
- Prices start going down.
- Public states start being harmed and there may be risks of defaults for countries.
- Lot of debt and taxes go down.
- Recapitalisation (recovery): Agents start deleveraging and the economy recovers
- Credit offer raise again and many entities have de-leveraged.
- Prices start going up after the liquidations from the previous stage.
- GDP starts going up.
- Expectations increase.
- Unemployment start going down again.
> Always have some liquidity available when the liquidation stage is approaching.
> These is an Austrian approach for the economic cycle, but this hasn't been the case lately where central banks are injecting a lot of liquidity to banks when indicators glimpse a crisis. The issue with drowning with liquidity the economy is that it "zombifies" it (like it has happened in Japan in the last few decades).
### Juglar Cycles and Kondratieff Seasons
- Joseph Schumpeter said that there were several simultaneous economic cycles.
- Kitchin Cycle: 3 years
- Juglar Cycle: 10 years (business cycle)
- Availability of assets (i.e. liquidity)
- Similar to the liquidity cycles from Juan Ramón Rallo.
- Spread between high-quality and low-quality credit starts being harmed when the cycles is ending
- Credit curve inverts.
- Similar seasons and indicators as in the liquidity seasons.
- Kondratieff cycle: 50-60 years (4 seasons of around 15 years)
- Long-term economic cycles.
- ~ 2 Juglar cycles per season
- He came up with these by studying macroeconomic indicators.
- He realised prices and interest rates was what impacts more the economic cycles and the change of "cycle seasons"
- Summer (estanflation)
- Autumn (desinflation)
- Autumn is the best season to invest in the stock market.
- Winter (deflation): Bad season for stock markets. It start surfacing some companies defaults. Prices go down, interest rates go down.
- Spring (reflation): Also a good season for the stock market. Prices start going up and there is monetary stimulus from public administrations.
- This leads to the zombification of the economy because there is a lot of monetary stimulus.
> Recommended Readings:
> * Socialismo, cálculo económico y función empresarial - Jesús Huerta de Soto
> * Dinero, Crédito Bancario y Ciclos Económicos - Jesús Huerta de Soto
> * Economic cycles - Joseph Schumpeter
### Source for macroeconomic indicators.
- Main source for indicators.
- https://tradingeconomics.com/countries
- Credit supply
- https://fred.stlouisfed.org/
- https://www.federalreserve.gov/releases/z1/
- https://www.federalreserve.gov/releases/h41/
- https://www.ecb.europa.eu/pub/annual/balance/html/index.en.html
- https://www.bde.es/bde/es/areas/estadis/
- https://www.bde.es/bde/es/areas/estadis/Estadisticas_por_publicaciones.html
- https://economipedia.com/definiciones/coeficiente-de-caja.html
- Credit demand
- https://fred.stlouisfed.org/
- https://www.federalreserve.gov/releases/z1/
- https://www.federalreserve.gov/releases/h41/
- https://www.bde.es/bde/es/areas/estadis/
- https://www.bde.es/bde/es/areas/estadis/Estadisticas_por_publicaciones.html
- Interest rates
- https://www.gurufocus.com/yield_curve.php
- https://fred.stlouisfed.org/
- https://www.federalreserve.gov/releases/z1/
- https://www.bde.es/bde/es/areas/estadis/
- https://www.bde.es/bde/es/areas/estadis/Estadisticas_por_publicaciones.html
- Actividad y expectativas
- https://fred.stlouisfed.org/
- https://www.bde.es/bde/es/areas/estadis/
- https://ec.europa.eu/eurostat/home?
- https://www.ine.es/
- Employment
- https://fred.stlouisfed.org/
- https://www.bde.es/bde/es/areas/estadis/
- https://ec.europa.eu/eurostat/home?
- https://www.ine.es/
- Cost and prices
- https://www.gurufocus.com/global-market-valuation.php
- https://fred.stlouisfed.org/
- https://www.bde.es/bde/es/areas/estadis/
- https://ec.europa.eu/eurostat/home?
- https://www.ine.es/
- https://www.imf.org/external/spanish/index.htm
- Exchange rates and external balance
- https://fred.stlouisfed.org/
- https://www.bde.es/bde/es/areas/estadis/
- https://ec.europa.eu/eurostat/home?
- https://www.ine.es/
- https://www.imf.org/external/spanish/index.htm
- Public finances
- https://fred.stlouisfed.org/
- https://www.bde.es/bde/es/areas/estadis/
- https://ec.europa.eu/eurostat/home?
- https://www.ine.es/
- https://www.imf.org/external/spanish/index.htm
## Passive Investment
- Indices is an average of certain stocks from a market. They can be weighted by market cap (e.g. SP500), or by stock price (Dow Jones)
- VIX is a good index to understand the volatility of the market. It is computed through options of the S&P500.
- PUT options are trying to sell options to cover themselves from potential crashes. If PUT prices for the SP500 increases it increase the VIX value
> When VIX goes over 50 and in the same year it returns below 50 it may be useful to put some money on an SP500 index fund because it means that it has gone down to a point where the profit can be maximised. It signs high-volatility years. Only the next year you increase the amount invested in funds
### Biggest index managers
- Amundi
- iShares de Blackrock
- Fidelity Investment
- Schwab (no disponible en España)
- Pictet
- Vanguard
### Fees and UCITs regulation
- ESMA regulation: Inability to invest in US ETFs
- This increases the fees for ETFs
- Smaller size than their US counterparts increasing fees and costs.
- UCITs regulation
- Only professional investors can invest in US assets.
- UCITs funds are the only vehicle that individual investors can invest in funds and ETFs in the US market.
- This is what we currently use in Europe to invest in Vanguard funds.
### BogleHeads Portfolio
- Check https://boggleheads.es for some ideas of how to build a BogleHeads portfolio
> Recommended Readings:
> * The Little Book of Common Sense Investing - John C. Bogle
> * How to invest on investment funds with common sense - John C. Bogle
### Resources to work with indices
- https://www.koyfin.com/home
- https://www.msci.com/real-time-index-data-search
- https://es.tradingview.com/
- https://tradingeconomics.com/stocks
- https://es.investing.com/indices/indices-futures
## Semi-Passive Investment
Strategies to invest in indices.
- Dollar cost average
- Market timing through when inflation raises or there is a crash.
- Use VIX and insiders insights
> Recommended book: La Guerra Financiera Asimétrica - David Núñez Longueira, Santiago Casal Pereira
- Semi-passive investment consists of:
- An emergency fund.
- Index funds as the base
- A small number of well-analysed companies for active investment.
- __The IED (Improvised Explosive Device)__
- Choose a yearly amount to invest in the index.
- Every year we increase the amount adding up the inflation of that year.
- If the index went down, you x2 the amount invested, x3 for the third year and so on with the corresponding inflation correction.
- When the market returns to positive returns, you go back to your initial amount with the corresponding inflation
- __Insiders strategy__
- Use gurufocus.com for this.
- Insiders are corporate managers that need to publicise their buys and sells.
- gurufocus.com/insiders/summary - shows if insiders are buying their stocks.
- When the insiders index goes over 1, it is generally a good idea to buy indices long-term.
- Also if VIX goes over 50, the SP500 is going down.
- These approaches work for SP500, it may be useful to find other metrics to find good moments to enter other indices.
> When the insiders index is over 1, it may be a good idea to enter SP500. This has shown historically better returns than the VIX and IED strategies.
> - If you make this updates yearly, you only increase the amount bought according to the number of months that the insider metric is over 1.
### Asset allocation
... i.e. building your own portfolio.
- When building your portfolio you need to think of the following for your asset allocation:
- Risk
- Liquidity
- Rate of profits / Returns.
- Types of risks.
- Specific risks and diversifiable: It can be prevented by diversifying into different types of investments and asset classes.
- Systemic risks and not diversifiable: This is correlated among different asset classes and can be prevented investing in uncorrelated asset classes and investments.
- Different asset allocation for the different economic classes:
- Boom: Stocks, commodities, corporate bonds and emerging markets.
- Recession: Nominal bonds, inflation-pegged bonds, gold and other assets to protect against the inflation.
- Deceleration: Emerging markets debt, commodities, bonds pegged to inflation.
- Recovery: Stocks, nominal bonds.
- Metrics to consider when evaluating your portfolio:
- Nominal CAGR: Compound annual growth rate
- Real CAGR: Including inflation
- Stdev: Standard deviation. It reflects the volatility of your porfolio.
- Max drowdown: The biggest crash impacted in the porforlio.
- Sharpe Ratio: Relationship between the net return free of risk (i.e. 10-year yield bond in the country that you are investing), and historical volatility (std dev)
- `(Total return - free risk rate) / volatility = (8% - 3%)/0.7`
- Sortino Ratio: Adjusted Sharpe ratio that only considers the negative std devs.
### Different types of portfolios
> One can use the portfolio visualiser to evaluate the performance of different portfolios.
- Bogle Portfolios
- Type 1: 60% stocks, 40% bonds
- Type 2: 50% US stocks, 30% bonds 20% ex-US stocks
- Type 3: 50$ US stocks, 30% ex-US stocks, 10% inflation pegged bonds
- On these portfolios, bonds are used to minimise the max drowdowns.
> Historically up till 2020, Bogle type 1 portfolio has the highest return, but it didn't have much difference with the other types.
- Permanent portfolio (Harry Browne)
- Worth reading through: http://www.carterapermanente.es/evolucion-cartera-permanente/ _(in Spanish)_
- 25% long-term bonds, 25% stocks, 25% cash, 25% gold
- The max drowdown is way smaller than the Bogle portfolios
- All Weather Portfolio (Ray Dalio)
- 30% stocks, 15% mid-term government bonds, 40% long-term bonds, 7.5% gold, 7.5% commodities
- Lower drowdowns than other strategies.
> In order to analyse the return of different semi-passive strategies use:
> * http://www.lazyportfolioetf.com/
> * https://www.portfoliovisualizer.com/: This tool allows you to create the portfolio, backtest the portfolio, and compare against existing benchmarks.
> Recommended reading:
> * Fail Safe Investing - Harry Browne
> * The small book to invest with common sense - John Bogle
> * La guerra financiera asimétrica - David Nuñez y Santiago Casal
> * Invest with the FED - Robert Johnson, Gerald Jensen y Luis García Feijoo
## Business Accounting
- The goal of a business is to generate free cash flow over investors expectations and maximise the long-term value of the company.
- Business balances allow us evaluate the intrinsic value of a company
- Through accounting all the operations of the companies are tracked and allows to give a snapshot of the status of assets and liabilities.
### Financial statements
- The balance sheet
- What is the state of assets and liabilities of the company
- This allows us to get information about the health and net worth of the company.
- Profit and loss account
- It allows us to understand the behavior of the business through time
- Cash flow statement
- This is one of the most important things to look at in good companies. Generating cash is key for the health of a company.
- Statement of changes in equity
- Audit and balance reports
- Useful to get additional context of the snapshot seen in the financial statement.
- Annual report
- Equity analysis
- Economic analysis
- Financial analysis
### Dynamic and static variables of balance states
- Static: Net worth and balance sheet analysis.
- Bathtub analogy: Depending on the flow of inputs and outputs (cash flows and profit and losses), the amount of water changes (balance status).
- Dynamic: Cash flow statements, profit and loss account, other reports
> References to get public balances and reports from public companies:
> - CNMV: https://www.cnmv.es/Portal/consultas/busqueda.aspx?id=25
> - SEC: https://www.sec.gov/edgar/searchedgar/companysearch.html
>
> Information about balances:
> -https://www.gurufocus.com
> - https://www.morningstar.es
>
> Also check the investors relations page in the public companies website
### Balance Sheet
- Assets: In what have the company invested?
- Current assets: In less than 1 year could be liquid.
- Cash and long-term investments
- Stock: there are of three types: raw materials, partially finished, finished.
- Non-current assets: Not expect to be liquid before 1 year
- Tangible fixed assets like machinery, building, cars, etc.
- This allows us to understand if the company is capital intensive.
- Investments in stocks and long-term bonds.
- This value can be volatile and should be considered with care.
- Non-tangible assets (i.e. goodwill)
- Coca Cola's trademark has a lot of value but is not considered in the balance sheet. This is used to consider the cost over the assets and accounting when buying a company. If the price paid is higher than the actual net worth it should still be reflected in the balance.
- Goodwill and some assets can be amortised to reduce profits
- Company trademarks are not reflected in the balance if they are created from scratch, only when they are bought.
- Liabilities: How has the company paid for this investments?
- Current liabilities: < 1 year debt
- Accounts receivable: Invoices that haven't been paid, but will soon be paid.
- This is the way that company finance themselves by delaying payments to providerse
- Short-term debt: Current assets need to be used to pay this short-term debt.
- This debt is risky as it has to be paid immediately.
- Non-current liabilities: > 1 year debt
- Long-term debts (i.e. bonds)
- Rating agencies give scores to this debt and helps understand the risk and solvency of the company
- Net worth: Ownership of founders and partners.
- Retained returns / profits. This reflects the profits that have not been paid through dividends or by buying back stocks
- This should be high to find quality companies.
- Obviously, the amounts of assets should match the sum of liabilities and net worth
- Company owners are the last ones to be paid, this is why is not great to in vest in companies with a large debt (as you will probably not get paid anything from the assets after a bankruptcy)
### Profit and loss statement
- `Profits = Income - Expenses`
- Income or goods sold: The different revenue streams. It may be divided by products, services, or geography.
- Cost of goods sold (COGS): Material buys, existent material, and sold material.
- Human resources that were involved in developing the product.
- Cost required to give the service or sell a product.
- Marketing or cross-functional actions
- Gross income: Income - COGS
- Additional expenses after the gross income to get the net income before getting into EBIT - Earnings Before Interest and Taxes (operational income)
- R&D and marketing generally outside the gross cost.
- It may be good to get the rate of this cross-functional operations v.s. the competition. Is a good way of understanding how efficient they are and how they compare to the competition.
- Other operational costs: closing a industry, exceptional actions. If this is recurring we need to be careful and understand what is happening.
- `Amortisation = (value to amortise)/number of years of useful life`
- EBIT hasn't been yet impacted by debt and interests. Is a good way of understanding the health of the business as it is not impacted by one-time payments and other non-operational costs.
- From EBIT to EBITDA
- Financial income and expenses
- Potential interests to their cash and interest of their debt
- EBIT / debt interests > 5 (we can cover 5 years of debt through EBIT)
- Exceptional income or expenses (e.g. when some factory floods, earthquakes, stock destroyed, etc.)
- Taxes
- Net income may not be showing the whole reality, it is easy for accountings to use financial engineering to make it more appealing.
- Earnings per share.
- The number of share should consider the stock options, the circulating supply of stocks. Use diluted stocks to compute the earnings per share.
- Earnings per share doesn't say much without understanding how the cash flow behaves.
- EBITDA = EBIT + Depresiation + Provisions
- This has been normalised but Munger and Waffet don't like it much.
- It doesn't consider amortised and other balance sheet items that do not impact the cash flow (although interests do)
- EBITDA is useful to understand the survival of a company and when they require a lot of investments.
- For the same EBITDA, we should consider the one that is least intensive in capital, i.e. with lower interests, amortisation and taxes.
### Cash flow statement
- It shows the amount of cash generated by the business throughout certain period.
- This is one of the most important financial statements.
- There are different types of cash flows:
- Operational flows
- Net profit - net cash received through operations.
- Amortisation should be included to the net profit because is not an outbound flow.
- This also applies to the deferred taxes.
- We subtract pension fund contributions.
- Add and subtract working capital (pending payments, other assets, changes in the balance of assets and liabilities, etc.)
- One-time and unique expenses or incomes.
- Investment activities cash flows.
- Investment (CAPEX) for non-current assets like machinery to keep operating.
- `Free Cash Flow = operational cash flow - capital investment`: i.e. cash that is left after all the investment required for the business.
- Returns from investments or assets sold
- Financing activities
- Cancel debt or issue new debt.
- Issuance or stock buy-backs.
- Buy backs make sense when the intrinsic value is below the spot price.
- Paid dividends
- Be careful with financial engineering, but cash flows generally never lies.
- Goodwill reflects the difference when acquisitions are performed.
- Careful with debt, look at current and non current investment and liabilities like you would do with your own financials
> Recommended readings:
> * Warren Buffett and the interpretations of financial statements - Mary Buffett y David Clark
> * Accounts demystified - Anthony Rice
> * Finanzas para directivos - Eduardo Martinez
> !! Resources for financial data: https://app.tikr.com/register?ref=f9ae1m
## Quantitative analysis of companies.
### Liquidity ratios
- To what extent can a company pay for all of its obligations.
- Some companies have low liquidity ratios, but if they are companies that have easy access to new short-term debt, then it may not be an issue.
- `liquidity ratio = current assets / current liabilities`
- `current ratio = total current assets / total current liabilities`
> If the ratio is `< 1` then the company doesn't have a way to to take care of their short-term debt with their current assets, while `> 1` it means that they can pay for their short-term debt.
- A cash ratio that is very high may also not be good because that would mean that there's __"Idle cash"__ that could be used to pay part of the long-term debt debt, return as dividends to investors (or through buy-backs), or be invested somewhere.
- `quick ratio = (total current assets - total inventories) / total current liabilities`
> - `>0.8` has enough quick ratio
> - `>1` is what is the recommended.
> - `>1.5` or around 1.5 is ideal
### Leverage ratios
- Debt is good as long as it is invested in promising projects.
- `Debt Coefficient = Debt / equity`
- `Debt Coefficient 2 = Debt / total assets`
- `Leverage ratio = total assets / (equity + non financial liabilities)`
- Low debt also allows for easier access to more debt eventually.
- When there is a crisis there is when high debt leads to issues.
- One of the best debt ratios is the one that helps understand the amount of debt compared to equity or the total assets
- `Interest coverage ratio = EBIT (operating income) / Interest expense`
> Interest coverage should be `>5` ideally
- `Net debt = total financial debt - total cash flows`
- Net debt if the above is positive, and net cash if it has more cash than debt.
- Altman Z-score
### Margin ratios
- "Look for companies with high profit margins" - Warren Buffet
- `Gross marging = gross profit / sales`
> - `>40%` of gross margin (this glimpses that the company may have pricing power)
> - `20-30%` of gross margin is a competitive landscape
- `EBIT margin = Operational profit / sales`
- EBIT is one of the most important metrics that can be used to understand the business realities.
- `Net margin = Net profit / sales`
> - `>20%`: is great (it generates 0.2 on the dollar of new cash flow)
> - `<20%`: the company may be in a really competitive industry
- `Free cash flow (FCF) = Operating cash flow - CAPEX`
- `Free cash flow margin = FTF / sales`
> - `>50% FCF` is great
> - `>10% FCF` may be good enough
> - `<10% FCF` we need to look in detail
### Growth
- Growth needs to be computed through the CAGR (Computed Annual Growth Rate) and not linearly.
- `CAGR = (Sales in last year / Sale in first year)^(1/n period of time)-1`
> - `>20%` CAGR is amazing
> - `>10% and <20%` CAGR is pretty good
> - `<5%` is a mature company that may be stabilising sales
- EBIT may be increasing over sales which would imply that the costs are being reduced what sales are going up.
- EBIT is usually from 5%-13%.
- Stock buybacks may artificially modify the growth of the return per equity as sales are growing but buybacks increases the effect.
> The growth of FCF is one of the key metrics as it let you know the amount of new cash that the business is able to generate year after year.
- We may need to compute all the metrics per equity unit to understand the stock liquidity and how it may be impacting the equity numbers.
- Organic growth: Generated by the intrinsic operation of the core business.
- Inorganic growth: Produced through acquisitions and benefit from synergies and buying companies that are cheap and they can leverage for their core business (it increases the numbers not because the business is being better, but because they consolidate the new business. After a few years they are consolidated and it becomes organic growth)
### Efficiency ratios
- Activity ratios: How fast the investment in assets generate sales.
- `Day sales outstanding = accounts receivable / (revenue / 365)`
- Time required to get the money after a sale.
- It may be a good metric to compare against the competition.
- `Days payable = Accounts payable / (COGS / 365)`
- It shows the negotiation power of the business over their providers. The bigger this value, the better as it gives flexibility to the business.
- This one should be larger than the day sales outstanding as it offers a free way to finance themselves.
- `Days inventory = Total inventories / (COGS/365)`
- Days until the stock is sold. It is a good way to understand the demand and may be good to compare with the cometition.
- `Cash conversion cycle = DAy sales outstanding + days inventory - days payable`
- This value should be minimised as much as possible. If negative it means that the business is getting free financing from their providers.
- The faster this cycle, the better the stock turnover, and the more sales they are generating.
### Return ratios
- The goal of a business is to maximise the return for every money invested.
- The mental framing should be the same as when you invest in a mutual fund, where you expect them to generate a return over the money invested.
- ROA: Return over assets
- `Net margin * rotating assets = net profit / total assets = ROA`
- `ROA = Net income / Average total assets`
- This shows how efficient a company is generating return from every USD invested in assets.
- Either you rotate your assets or you increase your margin to improve your return.
- ROE: Return over equity
- `ROE = ROA * financial leverage = Net profit / equity`
- This metrics determines the efficiency of the equity in the company
- We should consider the amount of leverage of the company
- Dupont formula for ROE:
`ROE = Profit margin * total asset turnover * leverage factor`
- If the ROE shows that is high due to the amount of leverage we should check the term of that leverage (there is clean, i.e. no interests, v.s. dirty, i.e. high-interest long-term debt).
- It is important to break down the ROE to understand where it comes from.
- Bear in mind that ROE includes all liabilities (good and bad)
- > `ROE > 15%` is healthy and shows a competitive advantage
- FCF: Free Cash Flow = Operative cash flow / CAPEX
- One should consider how the cash flow is re-invested in the business.
- Amazon, e.g. re-invests a good amount of their cash to minimise their profit and pay less taxes. This company generates a lot of cash flow but it is generally reinvested.
> High ROE and FCF are "money-making machines".
> - ROE > 10% to be interesting
> - FCF > 5%
- ROIC: Return over invested capital
- It includes all the leverage inside this metric.
- `ROIC = Net operating profit after taxes (NOPAT) / Capital invested`
- `NOPAT = Operational profit * (1 - tax rate)`
- `Invested capital = Total assets - account payables and accrued expenses - excess cash`
- `Excess cash = cash and equivalent - (curent liabilities - current assets + cash and equivalent)`: If this is negative we set it to zero for the ROIC computation
- This is a good way to understand the cash requirements of the business.
- Depending on who's computing this metric there are different ways of adjusting it (and this happens depending on the analyst).
> - ROIC > 10% is generally a good metric (ideally >15%)
> - WACC is the opportunity cost of the money (i.e. >9% to be comfortable)
> - ROIC should be larger than the WACC (ROIC > WACC)
> - If ROIC is low is better for the company to return to their owners through dividends
- ROCE: Return on capital employed.
- It only considers the operational assets (subtracting the leverage and interests)
- `ROCE = EBIT / (Net working capital + PP&E)`
- `Net working capital = (Accounts receivable + total inventories + other current assets) - (accounts payable and accrued expense + defer rev + other current liabilities`
- `PP, & E = Property, plant and equipment`
> - ROCE > 20-25% is ideal
### Valuation methods
- Net worth valuation
- `Book value = total assets - total liabilities` (i.e. net worth / equity)
- If the market cap is below the book value there may be an opportunity (this is the price to book)
- `Tangible book = total asset - intangible asset - total liability`
- `NCAV (Net current asset values`
- `Net net working capital`
- These valuations show a snapshot of the business and does not consider the future of the company.
- It is hard to find nowadays companies that fulfil Benjamin Grahams metrics.
- Cigar Butts (companies that are not followed by analysts and that are in a really bad situation, but they could still give some profit).
- Careful with management and value traps. Sometimes the numbers add up but they are a trap, they seem cheap but are almost dead.
### Discounted cash flows.
- The value of a stock is the present value of its cash flows.
- Through cash flows is a more dynamic way of evaluating its current value. Present value is generated through cash flow (otherwise you are speculating)
- WACC (Weighted Average Cost of Capital)
- Ideally the WACC should be close to the 9% to make sense (is the minimum CAGR that you ask for your investment).
- WACC is the minimum CAGR required by investors and the corporate owners.
- To compute the WACC you need to understand the beta of the industry where the company operates.
- `Opportunity cost = What one sacrifices / What one gains`
- Discounted cash flows make sense if we expect the company's cash flow to be somewhat stable or predictable.
- For stable companies we can consider a WACC of 9%
- For cyclic companies 12%
- And risky companies due to the industry or the countries where they operate a 15%
- This discount rate is used to determined how the future cash flows should be brought to the present.
- We use these to determine the discounted FCF
- WACC == Discount rate
- `Terminal value = Current flow (1 + g) / (discount rate - g)`
- `g` is the expected long-term growth of the cash flow
- Qualitatively, through the intrinsic value and the stock price we decide when to buy and when to sell (consider a security margin)
- On top of this analysis we should have a qualitative analysis to determine how good is the business.
> Recommended security margins
> - `20%` for stable and growing markets with competitive advantages. (Google)
> - `30-40%` for cyclic companies with middle risks. (Acerinox)
> - `>60%` for high risk companies without any competitive advantages (Sabadell)
### Valuation by multiples
- It enables the evaluation of companies from their static and dynamic behavior. Multiples are a great way to compare companies among them.
- Price Earning Ratios: `PER (PE Ratio) = Price / Earnings`
- How much we are paying for a company over earnings
- PER assumes the net profit and it as shown before it can be manipulated to minimise their earnings (and minimise their taxes), but it generates enormous cash flows.
- Enterprise Value metrics.
- Value of the company for owners, debt holders, etc.
- EV/Revenues, EV/EBITDA
`Enterprise Value = Market cap + long-term debt + short-term debt + interests - Cash or equivalents`
- Enterprise values are generally compared with historical metrics and then compared to other companies in the same industry
- Enterprise FCF
- `FCF yield = FCF / EV`: This metric determines the return compared to its real value.
- 3-4% of FCF yield is a good metric.
- This is one of the most valuable metrics to determine if they are good companies generating cash.
- Buyback and dividend yield.
- Dividends / EV and Buybacks / EV to determine the rate of dividends and buybacks compared to its values.
- The average dividend yields are around the 2% in the SP500
- Some companies do not buy back stocks but give dividends, and the other way around, or a combination of both.
- Be careful with companies that give dividends and buy back stocks even when they are not generating cash to justify it.
- Some companies get debt in order to give dividends.
- All these metrics should be understood in the context of their balance sheets (high dividend yields and low PER may be a value trap as they may been trying to optimise for this metrics).
### Graham's growth metric
- It is a great way to understand the intrinsic value of growth companies
(8.5+(2* growth earnings per share ) * current earnings per share) = intrinsic value ```
- Do not use this metric for > 7 years (we can’t expect a company due to business cycles to grow steadily more than 7 years)
- Expected 7-12% CAGR for the 7 years evaluated.
- It is easy to compute through the current metrics and expectations for the company. We can compare against current PER and stock price to understand if the stock is cheap.
Recommended readings
- The little book of valuation - Aswath Damodaran
- Invest like a guru - Charlie Tian Ph.D.
- Benjamin Graham and the power of growth stocks - Frederick K. Martin
- Strategic Value Investing - Stephen Moran, Robert Johnson y Thoma Robinson
- Valuation - McKinsey & Company
- The first thing worth doing when getting the raw balances from a company is to get the CAGR for different metrics (total operating expense, EPS, Shares outstanding, EBITDA, etc.) for 5/12 years to understand how it has been growing.
- When computing the discounted FCF we should consider a growth of FCF a bit lower (and corrected to the expected growth in the next years) for the next few years.
- Peter Lynch fair value = PEG Ratio * 5 year EBITDA Growth Rate * EPS without NRI
Qualitative Analysis
MOATs
- We should try to find mini-monopolies protected through moats.
- Intangible assets
- Trademarks that are hard to replicate.
- A large number of small regulations that protect the businesses so they can’t be immediately removed by a government change.
- Patents 1. Switching costs
- Banks, e.g. are hard to switch.
- Companies that create software that is hard to switch from (Oracle, Adobe, etc.). 1. Network effects
- The value of the product increases with the number of users.
- Direct network effects (social networks and advertisements, etc.)
- Indirect networks (operating systems and the network effects for the devices that run on them, e.g. Android/Windows)
- Cost advantages and efficient scale
- With a cost advantage you can compete by lower prices (this can be risky but is a valid approach) (Aramco).
- Logistics is a good example where the scale rises the barriers of entry.
- “Being a big fish in a small pawn is better than being a big fish in the bigger pawn” 1. Diworsification and where to find MOATs
- Technological disruption can erode critically MOATs (Kodak)
- Diworsification happens when a company starts making acquisitions with its idle cash that burns cash and gives no value to the core business.
- Youtube and Instagram were good acquisitions, but sometimes they buy others with high multiples and that adds nothing
- It may be good to compare the MOATs of similar companies (or direct competitors) in the same industry before investing there.
- Morningstars identifies wide (>10 years) and narrow MOATs (<10 years).
|  |
Management Team
- The managemet team should have “skin in the game”. The either most be founders or majority owners.
- Also check the incentives behind the management team.
- Things to check from the management team:
- Compensation (fixed or variable, what are the incentives, do they own the company or get stock options, etc.)
- What is the personality of the CEO (and management team): Interest aligned to that of the stock owners? Managers admit their mistakes? Are they realistic with their expectations (or do they over-promise)? Do they attract talent? Are they short-sighted or think in the long-term?
- Business management. Do they allocate capital efficiently? How are they using their cash flow and idle cash? Do they pay dividends, do stock buy-backs, and are they increasing the intrinsic value?
- Idle cash should also be used to reward stock owners.
Outsiders
- Their common trait is a good capital allocation
- Outsiders manage their cash flow personally and don’t delegate.
- What really counts is the increase of the value of the stock.
- The company’s value is determined by the cash flow and not by earnings
- They try to keep low costs.
- They are focused on the long-term.
- They generally create buy-backs when they see that the intrinsic value is below the public price.
- They are patient and they invest all-in when they identify an opportunity.
- The best way to evaluate a CEO is to check how the stock behaved compared to their competitors and the industry at the same time.
Porter’s five forces
- Evaluate the competitive forces of a company
Industry Maps
- A map with the value chain, and the different participants on an industry.
- This is a great way to find related companies in the industry that is an opportunity.
- We need to understand how interrelated companies.
- It is also a good way to understand the metrics and forces that impact the companies in this industry.
- Consumer-first companies is key (see Amazon).
Recommended readings
- El pequeño libro que genera riqueza - Pat Dorsey ( https://amzn.to/2D4SOQS )
- The outsiders - William N. Thordike ( https://amzn.to/3lkT4MG )
- Lecciones de liderazgo creativo - Robert Iger ( https://amzn.to/31s6uyG )
- Un paso por delante de Wall Street - Peter Lynch ( https://amzn.to/2YCaH14 )
Recommended links
- https://www.morningstar.com/
- https://www.gurufocus.com/
- http://pages.stern.nyu.edu/~adamodar/
- https://es.statista.com/
Best investors in history
- Warren Buffet
- Ray Dalio
- Peter Lynch
- Peter Lynch’s fair value
- Joel Greenblatt
- Carl Icahn
Recommended links to inspect the porfolio from big investors and managers.
- https://www.dataroma.com/m/home.php (This one is probably the best)
- https://whalewisdom.com/
- https://www.gurufocus.com/guru/george+soros/current-portfolio/portfolio
- https://app.tikr.com
Recommended readings:
- El póquer del mentiroso - Michael Lewis
- Flash Boys - Michael Lewis
- Por qué dejé Goldman Sachs - Greg Smith
- Un paso por delante de Wall Street - Peter Lynch
- Accounting for Growth - Terry Smith
- Deep Value - Tobias Carlisle
- The Joys of Compounding - Gautam Baid
- La educación de un inversor en valor - Guy Spier
- El inversor Dhandho - Mohnish Pabrai
- Grandes maestros de la inversión - John Train
- Warren y Charlie - Javier Caballero
- Only the best will do - Peter Seilern
- Principles - Ray Dalio
Portfolio management and tooling
- https://www.msn.com/es-es/dinero/mi-portafolio
- https://www.morningstar.es/es/PortfolioManager/createportfolio.aspx
- http://www.visualeconomy.com/MarketMonitor/MarketMonitor.aspx?Page=ECO_Home
- https://www.gurufocus.com/new_index/
- https://www.ocu.org/inversiones/mi-cartera
Tools to search for information
- https://www.koyfin.com/home
- Portfolio dashboard with a watchlist with news, analysis, filings, etc.
- https://www.gurufocus.com/new_index/
- A lot of information and screening tool.
- https://app.tikr.com/register?ref=f9ae1m
- The Bloomberg terminal for the poor.
- https://www.morningstar.com/
- https://seekingalpha.com/
- Really good analyses.
Backtesting tools
- https://www.portfoliovisualizer.com/
- https://www.etfreplay.com/
- https://backtest.curvo.eu
- http://www.gurufocus.com?r=f0c00696afa17a76c1cc5a53918da746
Investment thesis structure
- Research note with a executive summary with the recommendation for thesis.
- Introduction to the company, history of the company, business models.
- Analysis of the industries where the company operates, and its relationship with the economic cycle.
- How the company works, their business and KPIs.
- MOAT of the company and future risks.
- Analysis of its executives.
- Competitive analysis.
- Balance and financial status of the company (value the company quantitatively)
- Sources
Investment thesis checklist
-
Is the return on investment offered by this investment realistic or is it outside the middle market range?
-
Will I be able to withstand the position for 10 years? Will I be able to turn off the monitors and the broker account and maintain the position in my portfolio for more than 5 years?
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Is this investment a possibility that will beat inflation? Is the growth of its profit greater than the growth of prices?
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Are you really investing in the company with a long-term vision and compound interest, or is it just pure speculation?
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Does the possible investment exceed the opportunity cost of investing in fixed-income instruments?
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Is this investment, on average, better than the profitability of the major market indices over the long term?
-
Am I entering this investment out of fear or am I copying another known investor?
-
Is the company within my circle of competition?
-
Am I buying into a silver lining situation or is there no stressful situation?
-
Has the company’s liquidity position been reviewed?
-
Is the company having a current ratio (liquid assets/short-term liabilities) > 1?
-
Is the company having a Quick Ratio ((total assets-current liabilities))/ (total assets-inventories)/ (total liabilities) > 1?
- Has the company’s debt position been reviewed?
-
Does the company have a high financial leverage (debt/total assets) < 20%?
-
Is the interest coverage by the EBIT (EBIT/total interest payments) greater than 5 times?
-
Is the Altman Z-Score greater than 2.99 (indicating a stable situation)?
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Does the company have a Gross Margin (gross profit/net sales) > 40%?
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Does the company have an Operating Margin (EBIT/net sales) > 25%?
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Does the company have a Net Margin (net income/net sales) > 20%?
-
Does the company have a Free Cash Flow Margin (FCF/net sales) > 5%?
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Is the compound annual growth rate of its sales over the last 5 years greater than 10%? Is it if lower? Is it over the last 10 years? Are sales increasing after a deep crisis?
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Is the BPA growth greater than the growth of its sales? Is its FCF growing by 5 years at a faster rate? Has its FCF been positive over the last 5 years?
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Is the number of outstanding shares decreasing over the last 5 years? Are shares being repurchased?
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Is the growth happening organically through the business or is it through acquisitions of new companies?
-
Is the dividend paid annually or is it being repurchased instead?
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Is the average days of receivable decreasing?
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Is the number of days to pay suppliers increasing?
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Is the average days of inventory decreasing?
-
Is the cash conversion cycle positive or negative? If positive, is it decreasing the average number of days?
-
What is the Return on Assets (ROA) = (net income/net sales) x (sales/total assets) = net margin x asset turnover = net income / total assets? Is it greater than 8%?
-
What is the Return on Equity (ROE) = ROA x leverage (debt/total assets)? Is it greater than 10%?
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Has the ROE been analyzed using the Dupont formula? Where is the true return from the net margin, from the asset turnover or from the leverage effect?
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Is the operating cash flow growth of the business greater than its capital expenditures? Is the FCF maintained positive and sustained?
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What is the Return on Capital Invested (ROIC) = (net income-capital invested)/ (EBIT x (1-tax rate))/ (total assets-minus interest-bearing liabilities-excess cash) = (8.2%?
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What is the 3-year ROS (Return on Sales) according to Greenblatt = EBIT/(Capital employed net + Property, plant and equipment)? Is it greater than 25%?
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Is the company an operating asset value business like Graham?
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Does the company have a higher value than its market price?
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Is the company having more cash than its market value?
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What discount factor should be applied? Does the company have a correct WACC according to the valuation or is the market positioning a lower WACC than recommended according to its risk?
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What will be the residual growth after 10 years in the valuation?
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What percentages of probability possess the unfavorable, normal and favorable scenarios? Does the company have a security margin?
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According to the Graham growth analysis… What PER should the company have based on its expected BPA and FCF?
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Based on the expected BPA and FCF, does the company have a sufficient safety margin to consider it?
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What normalized multiples does the company have?
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What expected growth rate for its sales over the next 10 years is considered?
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Does the company’s debt net increase faster than its sales?
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What normalized PER is considered for the next 10 years?
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What EV/Sales, EV/EBITDA, EV/EBIT, EV/FCF does the company have?
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Does the company have a durable competitive moat or void of competitive advantage?
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Does the company have any competitive advantage that cannot be considered a sustainable competitive moat and that is affecting our analysis?
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What is the competitive advantage that if it is important over the long term?
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Does the company have difficult-to-replicate intangible assets?
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Does the company have a high switching cost for its products?
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Does the company have a self-reinforcing feedback effect?
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Does the company have cost advantages that can be harnessed?
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Is the CEO having a skin in the game with a high percentage of company-owned shares?
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Is the CEO a good allocator of capital?
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Is the CEO an outsider or an insider?
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Is the company a loner or a wolf in its business management?
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What is the competitive rivalry in the market? Is there a strong threat or is the company a monopoly?
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Does the company have negotiation power with its customers? Does it have pricing power without clients leaving?
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Can the company negotiate with suppliers and defer payment?
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Are there substitutes for the star product of the company?
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Are there barriers to entry in the industry, besides the company’s own?
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Is the company customer-centric, providing continuous value to customers?
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Is the company’s industry one of high returns or is it in decline?
- Does the company heavily invest in R&D to maintain its competitive advantage or is it done almost without investment?