Framework for looking for gems
"If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations"
Yesterday I wrote about how I think about the economy and the framework I use to come up with my base case. Today I want to focus on my active portfolio where I invest in individual companies. Picking individual companies is much riskier than investing in a broad market index ETF like SPY. I would recommend anyone who is a first-time investor to either invest in SPY for a year or follow the all-weather portfolio I mentioned yesterday. With that said, let's dig into the framework I'm using to do some shopping. I'm using Ashwath Damodaran, Wall Street's "Dean of Valuation", method for classifying companies. The categories are: Bargain Basement: These are companies which took a massive hit in the last few weeks, has low debt and scalable business model. Safety at Reasonable Price: These are businesses that are trading at a reasonable valuation, have a large market cap, low debt, and had high-profit margins pre-virus world. My 8-80 list would live under this category. Distressed Equity: These are companies which took a massive hit in the past few weeks, have high debt and high operating leverage. Change Agents: These are high growth newer companies who took a huge hit but have scalable business models. Let's put some companies under these categories! Bargain Basement: Delta (DAL) Boeing (BA) Transportation ETF (XTN) Russian ETF (ERUS) China ETF (MCHI) Safety at a Reasonable Price: Facebook (FB) Microsoft (MSFT)
Google (GOOGL)
Visa (V)
Bookings (BKNG)
Master Card (MA) Disney (DIS) Apple (AAPL) Warren Buffet (BRK.B) Change Agents: Zoom (ZM) Netflix (NFLX)
Teladoc Health Inc (TDOC) Uber (UBER) [Because of uber eats] Distressed Equity: MGM WYNN (other cruize lines and casino stocks) If I had to rank them in order of risk, it would be: 1. Safety at a Reasonable Price 2. Bargain Basements 3. Change Agents 4. Distressed Equity I will be starting new positions and piling for some of them in the coming weeks. Also, I plan to prepare a similar list for Indian companies, too, probably for tomorrow. If you have some recommendations just reply to this email!