How to decide which companies to invest in | Bill Ackman and Lex Fridman

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Feb 29, 2024 03:55 AM

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Technical trading

Fundamental analysis

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Bill Ackman shares principles on investing in companies, particularly focusing on Chipotle as an example.

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bill-ackman-principles

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The principles mentioned throughout this discussion include:

Evaluating Company Value: The process involves reading SEC filings (like 10-Ks for annual reports and 10-Qs for quarterly reports), understanding governance through proxy statements, and reviewing conference call transcripts. This step helps in understanding how the management describes their business and their achievements over time.

Understanding Industry and Competitors: It's crucial to look at competitors and the overall industry to assess potential challenges and opportunities for the company being evaluated. This can involve talking to industry experts, reading books about the industry, and using expert networks to fill in knowledge gaps.

Identifying Business Moats and Barriers to Entry: A key part of the evaluation is determining how protected a company is against competitors. This involves assessing the company's unique advantages or "moats" that make it difficult for new entrants to compete effectively.

Recognizing the Importance of Business Model and Systems: For companies like Chipotle, the emphasis is on fresh, sustainably sourced ingredients and food prepared in-store. These qualities create a significant barrier to entry due to the complexity of sourcing and maintaining quality at scale.

Assessing Management and Growth Potential: Understanding the company's management, their strategy for growth, and how they've navigated past challenges is critical. This can involve reviewing public appearances by company executives, such as podcasts or interviews, to gauge their competence and honesty.

Evaluating Financial Health and Cash Flow: Companies that generate a lot of cash and have a clear, understandable business model are preferred. This principle also includes looking for businesses with high barriers to entry and those that do not need to constantly raise capital.

Price vs. Value: The price you pay for a stock matters significantly. Investing in great businesses at too high a price can lead to disappointing returns. Therefore, identifying moments when a great business is undervalued due to short-term issues can present good investment opportunities.

Investing in Recoverable Situations: Opportunities often arise when a good business faces temporary challenges. If the underlying business model remains solid, and the issues are fixable, these situations can offer attractive investment prospects.

Understanding Industry Disruption Risks: In an era of high disruptability, it's important to invest in businesses that are less likely to be disrupted by technological advancements or new business models.

Recognising the Importance of Scale and Brand: Achieving a certain scale and brand recognition can serve as a moat, making it harder for new competitors to challenge established players.

These principles underline a comprehensive approach to evaluating and investing in companies, focusing not just on financial metrics but also on qualitative factors like management quality, business model sustainability, and industry position.

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