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Newsletter - September 9th, 2023

Dear Reader,


Attached is our latest list of stocks generated from basic value screens (low p/e, ev/ebitda, debt/equity, etc.), which don’t meet our investment criteria - and our reasoning.


This may help you avoid a few ‘value traps’ or stocks that aren’t sufficiently attractive compared to the opportunities available today.


For reports of stock ideas that pass our quantitative and qualitative standards, join at the link below:



 

Concentrated value - Part II

 

Concentrated Value - Bryan Lawrence (Part II)


Following last week, notes on another interview with Bryan Lawrence:


0:45 Five criteria for buys:


1) Understandable business

2) Great business - durable cashflows (see below)

3) Management alignment with shareholders

4) Cheap valuation relative to cashflows for shareholders

5) Temporary market misconception of value



1:30 Examples of durable cashflows


- Products/services providing substantial value to customers

- Favorable industry structure i.e. low-cost provider, natural monopoly/duopoly

- Failure of smart, well-capitalized competitors



28:00 Edge


If you're an investor trying to beat the market, you have to know what your edge is.


Re information edge, one counterargument to spending lots of time researching an idea is that you may get wedded to it. It's harder to drop an idea after you've spent much time on it - the fallacy of sunk costs.


Our edge is the minimum quantitative margin of safety that we demand on each investment we report on. The lower the quantitative safety margin, the greater the qualitative strengths we require.


Plus we don't stop searching for bargains across the world - especially smaller companies that larger investment funds can't participate/compete in.


We believe this process generates attractive stocks that are substantially cheaper than the market with decent qualitative features.



35:15 Disconfirming evidence


Look for disconfirming evidence about why you might be wrong. Munger talks about being able to make your opponent's argument better than he can. This is contrary to human nature but important for rational thinking.



1:00:30 Pricing power


Businesses that provide substantial value to customers - examples of businesses with installed bases of equipment providing low-cost services, suppliers of small but irreplaceable components in large ecosystems, etc.



50:15/1:07:15 - Leverage/Cash


It's generally risky to operate in stocks with leverage because anything can happen in markets that could jeopardize staying power. There are exceptions such as Shelby Davis - a reliable source of funding in market downturns is invaluable.


However, we don't advocate holding excessive cash if you have enough attractive opportunities to deploy it i.e. waiting for market corrections, which is an impossible game.

 

Until next time, Cheers!

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