best business in the world can’t command an infinite price!
- No matter how good a business, it's growth potential and management, it can't command
an infinite price
- Example of wonderful companies like Infosys and HUL which gave almost zero percent
return to their shareholders between 2000 and 2006 is a testament to that statement
- That is where we get down to valuing a company and ensure that we don’t OVERPAY by
comparing the market price with our conservative calculated fair value
- We don’t blindly use simplistic approaches to valuation like P/E and P/B. For e.g.
we check whether the “E” in P/E is sustainable, can the earnings grow substantially in the future , capital structure of the company etc.
- We also emphasize on quality of earnings by comparing accrual earnings with cash earnings. This helps us to understand the true health of the business
- Depending on the kind of business we are analyzing, We use different approaches to
valuation including discounted cash flow, residual income model, expected returns
- We recommend compounding machines only when they are available at attractive
valuations. Till then, we are happy to keep them in our watchlist and wait for Mr.
Market to offer the right price