https://fs.blog/2019/02/investment-algorithm/
A 7–Element Algorithm for Equity Investing
Everyone Wins
Successful businesses have indefinitely sustainable business systems: owners, employees, customers, suppliers, all content.
Ballast for the Storm
Look for a sustainable balance sheet, given the capricious nature of the world. Past bad events do not predict future bad events. Sometimes inefficient balance sheets allow companies to survive by positioning them for all environments, not just optimizing for one.
Different and Hard to Match
Candidates must occupy a structurally profitable, indefinitely sustainable business niche, allowing for the truism that all moats are subject to being crossed eventually. There must be an element of mystery.
Operational Soundness
Reliable execution of the “blocking and tackling” of operations is a must. Getting this wrong always costs big, and can ruin a good niche.
A Few Simple Variables
Allowing for the difficulty of predicting the future, candidates should have just a few reasonably predictable economic variables that will dominate their outcomes. In the words of Warren Buffett, “There are all kinds of businesses where we have no idea what they’ll earn this year, let alone any future year.” Look for boring investments, sexy is usually complicated and full of competition. Look for what’s staying the same.
Long Runway
You should be able to foresee an indefinite period of growth ahead, through some combination of market creation, market penetration, and pricing power.
Priced Attractively
Stock should be priced so that stock returns >= business returns, always including a margin for errorin forward-looking estimates.
Seemingly missing is the concept of “good management,” but I consider this redundant in light of the first four elements. Any business meeting those criteria is being managed properly, and any investment going 7/7 has a very low probability of failure.
Notice that the word indefinite is used several times. This does not mean the same thing as infinite. There are no infinities in the business world. Indefinite means “as far out as can presently be seen.”
Caution: what psychologists call the “representativeness heuristic” puts us at risk of over-fitting to this or any algorithm. Always be on guard. In the words of Richard Feynman, “Never fool yourself, and remember that you are the easiest person to fool.”
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A 7– Element Algorithm for Equity Investing
Everybody Wins
Fruitful organizations have uncertainly practical business frameworks: proprietors, workers, clients, providers, all substance.
Weight for the Storm
Search for a manageable accounting report, given the fanciful idea of the world. Past awful occasions don't anticipate future terrible occasions. Once in a while wasteful asset reports enable organizations to get by situating them for all conditions, not simply upgrading for one.
Extraordinary and Hard to Match
Applicants must possess a fundamentally gainful, uncertainly practical business specialty, taking into account the cliché that all channels are liable to being crossed inevitably. There must be a component of puzzle.
Operational Soundness
Solid execution of the "blocking and handling" of tasks is an unquestionable requirement. Failing to understand the situation dependably costs enormous, and can demolish a decent specialty.
A Few Simple Variables
Taking into account the trouble of foreseeing the future, hopefuls ought to have only a couple sensibly unsurprising financial factors that will rule their results. In the expressions of Warren Buffett, "There are a wide range of organizations where we have no clue what they'll acquire this year, not to mention any future year." Look for exhausting ventures, provocative is normally muddled and loaded with rivalry. Search for what's remaining the equivalent.
Long Runway
You ought to most likely predict an uncertain time of development ahead, through a blend of market creation, advertise entrance, and estimating power.
Estimated Attractively
Stock ought to be valued with the goal that stock returns >= business returns, continually including an edge for mistake in forward-looking evaluations.
Apparently absent is the idea of "good administration," however I consider this excess in light of the initial four components. Any conference those criteria is being overseen legitimately, and any venture going 7/7 has a low likelihood of disappointment.
Notice that the word inconclusive is utilized a few times. This does not mean indistinguishable thing from endless. There are no vast qualities in the business world. Inconclusive signifies "as out of sight can by and by be seen."
Alert: what clinicians call the "representativeness heuristic" puts us in danger of over-fitting to this or any calculation. Continuously be alert. In the expressions of Richard Feynman, "Never trick yourself, and recall that you are the least demanding individual to trick."
