Measuring The Moat

wealthymattersIf a competitor had unlimited resources , how quickly could they duplicate the company’s competitive advantage ?


Seth Klarman On Value Investing


The Superinvestors of Graham-and-Doddsville

wealthymattersThe Superinvestors of Graham-and-Doddsville is a seminal essay by Warren Buffett.

Buffett begins this essay by imagining a nationwide coin-flipping contest. Everyone in the US participates and calls the flip of a coin. Call correctly and move on to the next round, guess wrong and you’re out.After 20 days, about 215 lucky flippers will have correctly called 20 consecutive flips. They gloat about their success, yet the nature of coin-flipping tells us they’re just lucky. It’s a game of random chance.

But what if all 215 flippers lived in the same town? What if they all hailed from the same school? The same fraternity? Then we’d get excited. The laws of probability suggest 215 winners after 20 days. But those same laws tell us that if all 215 belonged to an associated group, that almost certainly wouldn’t be the product of random chance. These 215 flippers clearly would know something we don’t.

The real flippers in Buffett speech are nine “superinvestors” — himself included. All nine crushed the market averages over multiyear periods by between 8% and 22% per year.In a world with millions of investors, such returns can occur by sheer luck — just like the 215 coin-flippers appeared at first glance. But all nine superinvestors hailed from the investment school of Benjamin Graham and David Dodd — Columbia professors now known as the fathers of value investing. That meant something big. It meant that their success wasn’t the product of luck. It almost had to be attributable to the only common link they shared: the investing philosophy learned from Graham and Dodd. The “intellectual origin,” as Buffett put it. Read more of this post

Enterprise Value

wealthymattersEnterprise value is the figure that, in theory, represents the entire cost of a company if someone were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market capitalization because it takes includes a number of important factors such as preferred stock, debt, and cash reserves that are excluded from the latter metric.

Enterprise value is calculated by adding a corporation’s market capitalization, preferred stock, and outstanding debt together and then subtracting out the cash and cash equivalents found on the balance sheet. (In other words, enterprise value is what it would cost you to buy every single share of a company’s common stock, preferred stock, and outstanding debt. The reason the cash is subtracted is simple: once you have acquired complete ownership of the company, the cash becomes yours).

Frequently called “market cap”, market capitalization is calculated by taking the number of outstanding shares of common stock multiplied by the current price-per-share. Read more of this post

Gone Fishing With Buffett

wealthymatters Warren Buffet follows his own investment method and has stuck to it through thick and thin to made a lot of money. The key principles of this investment method, as described by Sean Seah in his book Gone Fishing with Buffett are as follows:

1. Investment Rule Number 1: Never Lose Money
Investment Rule Number 2: Never Forget Rule Number 1.

2. Risk comes from ignorance.

3. Buy businesses with good and exceptional economics and buy them at a sensible price. Repeat until wealthy.

4. The stock market is the only place where people who drive BMWs take advice from people who take the train.

5. If you need complicated maths for investing, Buffett would probably be distributing newspapers today. Read more of this post

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