Today being May 4th, may the investing force be with you! I cover the May chapter of Danielle Town’s and Phil Town’s Invested Book (2018) on Charlie Munger’s moat and management principles.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
In this chapter, 2 out of 4 principles of Charlie Munger’s way to evaluate businesses are discussed:
-Moat is an intrinsic, durable competitive advantage
-Management with integrity and talent
There are 5 (and a half) types of moats, and they include: brand, switching, network effects, toll bridge, secrets, and price. I share examples of each of these types based on what I learned from this book chapter.
In order to measure the quality and quantity of the moat and management, I use Starbucks as an example that I analyzed and did some high level research on.
I looked at Starbucks’ income statement, balance sheet, and cash flow numbers to consider some of what Phil Town calls the big 4 growth numbers of 1) net income, 2) book value to get the equity, 3) revenue/sales, and 4) operating cash. You want to see these numbers growing at 10% or more per year per Phil. And we also take a windage growth rate about estimating the average growth rate of the company in the future.
I also evaluated the management’s quantitative performance based on calculating the return on equity (ROE) and return on invested capital (ROIC), and identifying the debt figures. Ideally these should be at 15% or better per year according to Phil.
There were other factors I looked at including insider trading trends.
There’s a great quote from Buffett: “invest in a business any fool could run, because someday a fool will run it.”
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