乐生活A particularly back-to-origin question:
What on earth is value investment?
Is the company’s valuation particularly low and has a margin of safety?
Is the company’s ROE particularly high and worth investing?
Or are they both?
…
This seems to be a very elementary problem, but it is really important and not easy to get back to the origin.
The focus of value investment includes not only the safe margin of valuation, but also the strong profitability and intrinsic value of the company, which is good.
But the greater emphasis is on the profitability or sustainability of the growth of the company. (Knock on the blackboard and draw the key points!)
Why is that the point?
Because there is a safe margin in the valuation of the current time point, it does not mean that there is a safe margin in the valuation after three years and five years. The passage of time, commercial competition and long bear market may make the immediate safety margin disappear.
Similarly, the company’s profitability or growth at the current time point may be temporary and surfing. Generally speaking, the probability of excess profits exceeding the average return on capital of the whole society for a long time is very low. Commercial competition often makes excess profits disappear.
Therefore, the focus is on the sustainability of profitability and the margin of valuation safety based on this sustainable profitability.
For example, even if FCFF / EV may be more than or equal to 100%, it seems extremely safe. You can’t help but see that the company’s cash cow project may decline in profitability, or the company’s management may be ready to do a few idiot mergers and acquisitions. For those who don’t want to be active investors, the safety margin is not safe at all.
For example, the sustainability of excess profits, such as 80% gross interest rate and 30% net interest rate, requires a sustainability "moat" that is almost unfathomable, often not explained by a scale advantage or so-called occupying mind. Only to the extent of this barrier and moat, this excess profit is bound to attract large-scale capital investment and competition.
(Yes, I’m alluding to some A-share listed companies…)
Why is it that Buffett Munger, a value investor with strong business insight and thinking ability, modestly calls certain new areas outside the cognitive grid? It is not a lack of cognitive ability, but the sustainability of profitability in these areas is extremely difficult to grasp. The moat has not yet formed in some companies, so the space for expected earnings is very uncertain.
For example, the current coffee, short video, or even long video market, although growing very fast, the future space is enormous, but can not withstand the industry competition structure is bad, one can burn more money than one, which company moat is not clear, how do you invest value and find the safety margin?
These are the typical cases outside the framework of value investment and within the possibility of venture capital.
Value investment cures diseases, but not all diseases.
