Learning from The Investment Checklist

Dear readers, this is a post where I wrote down some lines from the book which stood out greatly. Please ignore the mess…

• If sales drop, identify why they are dropping instead of focusing on how much they dropped.
• Find out whether the business has recourse or non-recourse debt. Non-recourse debt is more prefered because it is secured by a particular asset and not by the overall business. If things go bad, the biz just has to surrender the particular assets.
• What counts is the ability of a business to reinvest its excess earnings at high ROIC, which is what creates future value.
• Companies may do a huge write-down in assets so that the depreciation and amortisation expenses are reduced for all periods in the future.
• “if the provision account estimates increase or decrease by a material amount over a three-year period while charge-offs remain constant, this may be a sign that management is using reserves to manipulate earnings.”

Categories of Companies

Cyclical Industries (consumer discretionary): Household furinture, apparel, appliances, vacation travel, automobiles, homebuilding, big-ticket luxury manufacturers, residential construciton

Less Cyclical Industries: advertising, medical equipment, drugs, periodicals, insurance carriers, dairy products, legal services, accounting services and bakrey products.

Countercyclical business: discount retailers, private-label products, medical care.

Independent: tobacco, pipelines carrying oil and gas, student-housing REITs, funeral serices.

Degree of Recession Resistance

• The amount of reurring revenues a business generates
• The percentage of the customer’s budget hat is spent on that business’ product or service.
• The percentage of its customers that are exposed to business cycles and how sensitive they are to these cycles.

Assessing the Quality of Management – Background and Classification: Who Are They?

Top managers are

1) responsible for designing the biz
2) determine the future growth rate of a business
3) in-charge of choosing the right people and providing the right environment for these people to perform at their highest-potential
4) determine how to allocate the firm’s capital.

Some further advice:

find out their tenure, focus on it.

“Another less direct but substantial benefit of partnering with proven and competent management teams is that it fres your time to focus on other investment opportunities. If you partner with incompetent management teams, you have to spend a lot of time monitoring their actions.”

Shareholder value is a byproduct of a business that keeps its customers happy. It is surprising how few CEOs manage the business for the benefit of al stakeholders. The reason is that it is harder to do. It is easire to focus on one constituency, such as stockholders rathern than many.

“Contrary to popular belief, most successful businesses are built on hundreds of small decisions, instead of on one well-formulated strategic plan. They instead build their business day by day, focusing on customers needs and letting these customer needs shape the direction of their businesses.”

“You need to determine if the management team you are investing in works on proving a concept before investing a lot of capital in it or whether it prefers to put a lot of money in all at once hoping for a big payoff.'”

“A CEO is very likely to do things to remain committed to meeting his stated plans because the consequences of not meeting them are that the stock goes down, thereby reducing the value of sotck potions or tarnishing the reputation of the mangement team. The management thus becomes committed to only one way of doing biz.”

The highest risk are setting financials goals – the single plan will dominate all the activities of the biz at the expense of other areas.

“What type of board members does the CEO choose?” You do not want a rubber stamp board, political figures, friends, consultants, or lawyers.

“When it comes to people, the best predictor of future behavior is past behavior.”

“The only way to do great work is look what you do. If you haven’t found it yet, keep looking. Don’t settle.”

Does the CEO love the money or the business? Would the CEO refuse to sell the biz, no matter what the price? Is the manager interested in money or motivated by money? Are the managers lifelong learners who focus on continuous improvement?

Does the CEO jump from one industry to another?

Are the managers life long learners who focus on continuous improvement?

Going for Longevity Pitch

“The reason that particular casino was successful is that the manager took the time to learn the language and culture of these Japanese gamblers.” (You can learn the form but ont the substance)

“As Strayer’s CEO Robert Silberman says, “What makes a business attractive is ont the rate it can grow in any single year, but the number of years it can grow at any rate.” The destiny of any fast-growing business is to experience a growth rate that slows down at some point.”