Company Quality
Free Cash Flows
Free Cash Flows (operating cash flows less capital expenditures) — is very important for several reasons.
Interest Coverage Ratio
Investors should ignore the debt-to-asset ratio and pay closer attention to interest coverage ratio or debt payoff ratios, which tell a more accurate story about a company's capital structure.
Loan-to-Value Ratio
Svenska's lending practices are very conservative — loan-to-value for Svenska-generated mortgages is 55%. House prices would have to drop 45% before Svenska would start losing money on mortgages.
CEO’s Responsibility
A CEO's responsibility is to create shareholder value. But a CEO's job is to achieve that through earnings and increasing the moat around the increasing return on capital, growing business; not through stock manipulation.
Unanalyzable Stocks
Large financial institutions appear unanalyzable. In fact they are more like highly leveraged hedge funds and, as with hot dogs, you don't really know what goes into them. Without proper analysis, one cannot assess risk or determine valuation, reducing ownership to speculation.
Share Buybacks (distortion)
Despite Apple's earnings rising from $37 billion to $57 billion, its book value declined from $123 billion to $78 billion. For every share repurchased at $50 with book value of $1, you automatically create negative $49 in book value 'destruction.' So it's completely meaningless.
Perennial Compounders
Companies that are run by owner-operators that have a high return on capital and a long growth runway.
Dusty Gem
In the quest for value, we seek gems that have collected the dust of confusion and misunderstanding.
Return on Capital
High Return on Capital (and economic value added returns) far exceeding the cost of capital, another scorecard for value creation.
Operational Leverage
RX has incredible operational leverage since the bulk of its costs are fixed, with the exception of consulting. Operational leverage coupled with high sales growth should help to lift profit margins.
Quality (as a spectrum of light)
I think of quality as a spectrum of light: black and white and color. Black and white are the fundamentals — the essential craftsmanship. In research, it's building financial models where we stress test every assumption. The color is more elusive — where art lives.
Quality (Buffett’s test)
I like Warren Buffett's definition of quality: if the stock market was closed for ten years, would I be comfortable holding this stock?
Quality as Multiplicative
Quality is multiplicative, not additive. Like multiplying numbers, one zero brings the whole product to zero. One poor surface can undermine everything.
Sustainable Competitive Advantages (Moat)
A deep moat around its business often created by strong brands, high barriers to entry, patent protection etc — allowing a company to have a leg up against competitive threats.
Barriers to Entry
Barriers to entry in this industry are very significant. In addition to negotiating thousands of contracts with data providers and gaining access to several hundred thousands of data sites, an entrant would have to overcome investments in intellectual property.
