http://valuecreatingbusinesses.blogspot.com/2021/03/good-read-translated-330-billions.html
Prelude:
Main Analysis Framework
Personally, I prefer a top-down approach when analyzing an investment. I always start from industry and narrow down to specific companies. Occasionally, I do start with the company then backward to its industry.
Firstly, analyses of an industry.
Second, analyses of the economics moats of a company.
Third, analyses of the potential growth of a company.
Fourth, analyses of potential risks.
Fifth, analyses of the valuation.
Sixth, analyses of the potential range of the total return.
My main standard of picking a stock
Firstly, it must have a sufficiently wide economics moat.
Economics moat determines the certainty of profits.
Secondly, it must have sufficient potential for growth.
It should at least have 4-5 times potential growth in net income.
Thirdly, it must have a low enough valuation.
To ensure high enough return even if the company suffers a decline in valuation (e.g. Amazon's 120 times PE drops to 75 times PE).
Fourth, the expected total return should not less than 5 to 10 times.
The expected return is not exactly the real return. In reality, there will always be countless surprises. A stock with 10-times expected return could die in some accident or does not grow due to poorer than expected in operation. Diversifying into 3 to 5 stocks, even if one stock achieves 10 times return, the entire portfolio would be much better off compared to the benchmark.
Many asked why do I always talk about 10-times return.
If you can't even see a potential of 10-times return, I honestly think you should just buy ETF's. ETF's (in China) in general gives an annualized return of 9%, which equivalent to 2.5 times return over 10 years.
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