The Little Book That Builds Wealth - Chapter12

This chapter deals with how to value companies that we have identified.  Intrinsic value of any asset is equal to the present value of all the cash that asset can generate.  Four important factors as per the author are earnings growth , certainty of that growth (risk), ROCE and moat.  Buying stocks at an attractive valuation makes the returns better than buying at higher valuation as the margin of safety is better.

The Little Book That Builds Wealth - Chapter11

In this chapter, the author provides some practical application of the learning and selecting stocks based on this understanding.  Some key points are

• To check for economic moat, first see if the company had a historic record of generating high return on capital.
• If it is high, ask yourself a question as to how the company can maintain this return.  Use the tools from chapter 3 to 7 to identify the moat that the company has that would let it maintain this return.  If we are unable to pin point the right moat, the chances are there is no moat  for this company.
• Once a moat is identified, think how long that moat can last for the company before it can be eroded.

The Little Book That Builds Wealth - Chapter10

As per the author, the management matters less than what we think.  It is always better to bet on the horse than the Jockey.  This seems to be in line with what Buffet said 'When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.'


Another one of Buffets quote that comes to my mind is 'Buy a business that any idiot can run because eventually an idiot will run it'.

This chapter makes a lot of sense because just betting on someone in management is thinking very short term.  The person could fail or may leave the company and we may end up with a bad investment.  If the business is fundamentally strong and has a very strong  moat, it will do good even if an average honest manager runs it.

The Little Book That Builds Wealth - Chapter9

This chapter deals with finding moats in various industries.  Some industries have strong moat compared to others by nature.  Per auther, Media has the highest moat % followed by utilities, financial services and energy.  Lowest moat is in Industrial materials and hardware (mostly commodity).
Generally the fourth best player in an attractive industry would have a stronger moat than the first player in the worst industry.  This is very very true.  Compare textile players to FMCG in Indian scenario and we know what this author is talking about. 

The Little Book That Builds Wealth - Chapter8

This chapter explains how moat erosion can take place.  Technology changes can erode moats in a drastic way.  There are tons of examples for this right from Typewriters to cameras.  Kodak and Polaroid were once strong moat companies and they have lost out completely to today's digital camera world.
If the companies customer base is very concentrated, then that moat is risky. If the competitors are engaged in a self destructive competition then the moat could be risky as well.
Some strong moat companies that generate great return on capital may invest in businesses that they do not have competitive advantage in and that could erode the overall moat of the company and destroy shareholder value.  They would be better off to return back the money to shareholders instead.  One good example, I can think off is Deccan Chronicle.  It has a very good newspaper publishing business which give good return on capital. The management instead of returning that money to the shareholders have invested in Odyssey retail, which not only sucked all the capital and is high on debt but always made big losses.  This and other business made the return on capital worse than a savings deposit.