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Homepage Pasture the Company Portfolio |
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¡@ Pasture ¡§buys¡¨ business ¡@
We are not
analysts |
Comprehensible products and services
¡@ ¡@ There are three kinds of analysts: market analysts, macroeconomics analyst, and security analysts. We don¡¦t know how to predict interest rates, so we are not economic analysts. We can¡¦t predict the P/E ratio or the price of bonds, so we are not security analysts either. We don¡¦t know whether this moment is a bull or a bear market, so we are not market analysts. ¡@ In fact, instead of labeling ourselves as any kind of analysts, we would ask the following four basic questions in investment when buying a business:
3: How much is it?
¡@ Buying a business and buying a stock are very similar. Pasture follows certain guidelines to distinguish between a good business with an ordinary business. We summarize the guidelines as follows: ¡@ How much should we need to understand products or services? Different people have different abilities to understand different things. For an expert in differential geometry, the Christoffel symbol of second kind is understandable; while for an uneducated, he even has a difficulty to distinguish the difference between 2x and 2 + x.
¡@ If we do not know the difference between a router made by Black and Decker and one made by Cisco Systems, sidestep both stocks. The product is not understandable to us. Are the products and services "smellable", "eatable", "seeable", "touchable", and/or "hearable"? If we do not know how to compare products and services of a company with its competitors, the business is not understandable to us. ¡@ We believe that success in investment is not a matter of how much we know but how realistically we define what we do not know. We will invest within our circle of competence. ¡@ ¡@ Pasture believes that severe change and exceptional returns usually don¡¦t mix up. In fact, turn-around in business seldom turns. More precisely, ¡@ Pasture likes companies that have been producing the same or related products and services for several years. ¡@ Pasture avoids companies which fundamentally change the direction of operations because their previous plans failed. That is, Pasture avoids hit-and-run companies.¡@ ¡@ We would purchase businesses with consistent operations at reasonable prices than businesses with irregular operation with cheap prices. ¡@ Favorable long-term prospects ¡@ Some CEOs of Fortune 500 company even claim that they are not sure whether their companies still dominate the market places a year later unless they undergo massive corporation transformations. Before investing, Pasture would ask two questions: Will this company still be in operation 10 years from now? Will the profits keep growing? ¡@ In fact, a business can be simple and understandable. Besides, it can have very regular operations. But it will still produce inferior return and may not even survive after several years. Why? One reason is that it lacks consumer monopoly, or the company is not the leader among its competitors. Some qualitative questions to test whether a business/company is a consumer monopoly/leader: ¡@ Do the stores need to sell that kind of products in order not to lose sales? If someone gave you the rights to a particular brand name, would the investment bankers at Salomon Brothers or Goldman Sachs consent to raise the billions you would need to start production? If yes, you know you have got a winner Are there any price wars? Are they among producers or among merchants? If the price wars are among merchants, not producers, then you get the winner. How much capital and skilled personnel Mr. Li Ka-shing needs to compete with such a business? If the answer is no matter how much, he won¡¦t succeed, then the business is surely a consumer monopoly High initial paid up capital so new entrants are rare Costly for customer switch products or services (e.g. It is time consuming for customers to learn new software products) Patent or government regulations New and expensive distribution channel must be created for new comers Products that used up quickly No single customer dominates turnover Hard for customer to switch to competitors products or substitutes Bargain abilities with suppliers. In fact, a bad relationship or poor bargaining power with suppliers can destroy the business. Free to adjust prices to inflation No frequent upgrade/expensive maintenance of plants, less capital expenditure. ¡@ Pasture Investment Corporation Limited |