Click to listen to the latest episode of The Richards Report featuring John Sevior.
In the second episode (see link above) we go through the four-step process John uses to make his investments. He says this screening process is ultimately about reducing the potential to lose money, and then putting a valuation on the business at the end to determine whether the company is a buy or not.
Step 1: Determine financial strength through analysis of the balance sheet.
In this step John is looking at what could potentially make a business go bust. John mentions that debt levels are the most likely cause of trouble.
Step 2: Quality of business
Disruption can come from anywhere and this step is all about determining the company and the industry it’s in. A monopoly (or a duopoly) is the best-case scenario and Warren Buffett coined the idea that good businesses have a metaphoric “moat” - but these are quite rare, and usually come with a very high valuation!
Step 3: Quality of management
People can tell you lies, so looking at a company’s track record is critical. Do they do what they say they’ll do, or are they making excuses? John likes management that “share success collectively, and take failures personally”.
Step 4: Valuation
This step is crucially important and it’s possibly the hardest step of all four. This is possibly more art than science too. Here John looks at lots of different multiples, which he outlines in the podcast. Simplistically he calls it a rule of thumb approach as there isn’t just one measurement of valuation that works for all businesses.
When John buys a stock, he almost invariably has a figure in mind already that he would sell at. John says that a mistake he has made is simply looking at historical valuation instead of taking into account current price of peers too as industries and market conditions change, which subsequently affects the valuation.
John says doing your homework is very important because you’re responsible for the decisions you make, whether that is buying and selling the shares yourself, or having someone else such as a fund manager or a robo-advisor like Six Park to manage your investments for you. You can find out more information here about John’s fund, Airlie Funds Management.
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