Showing posts with label predictable performance. Show all posts
Showing posts with label predictable performance. Show all posts

Tuesday 30 July 2013

Are the earnings of the business relatively predictable or highly volatile?

A couple of important points worth considering in understanding a potential investment is whether the earnings of the business are relatively predictable or likely to be highly volatile.  

It is relatively easier to invest in something where the projected earnings are likely to have a strong element of stability about them.  

Earnings should preferably be consistent, sustainable and predictable.  "The past is so much easier to predict."

Sunday 23 December 2012

Would you rather be with Andrew or Linda? Businesses manage their finances just like individual people. :-)

Predicting the future networth of these individuals.

Andrew: Risky to Predict

Linda: Less Risky to Predict



Just because a business has volatile numbers doesn't mean it won't make a lot of money in the future.

It's just more difficult to predict and value = RISK.

Buffett Rule: A Stock must be stable and understandable.

Saturday 4 July 2009

Value Investing: A Quest for Consistency

Value investors have varying approaches to risk, some willing to accept greater risk for greater rewards.

However, almost all value investors like a degree of consistency in
  • returns,
  • profitability,
  • growth,
  • asset value,
  • management effectiveness,
  • customer base,
  • supply chain, and
  • most other aspects of the business.

It's the same consistency you would strive for if you bought that espresso cart or hardware store yourself.

Before agreeing to buy that hardware store, you'd probably want to know that the customer base is stable and that income flows are steady or at least predictable. If that's not the case, you would need to have a certain amount of additional capital to absorb the variations. Perhaps, you would need more for more advertising or promotion to bolster the customer base.

In short, there would be an uncetainty in the business, which, from the owner's point of view, translates to risk.
  • The presence of risk requires additional capital and causes greater doubt about the success of the investment for you or any other investors in the business.
  • As a result, the potential return required to accept this risk, and make you, the investor, look the other way is greater.

The value investor looks for consistency in an attempt to minimise risk and provide a margin of safety for his or her investment.

This is not to say the value investor won't invest in a risky enterprise; it's just to say that the price paid for earnings potential must correctly reflect the risk.

Consistency need not be absolute, but predictable performance is important.