Simplicity and clarity

With all eyes today on the U.S. presidential elections and my attention focused on our companies’ quarterly earnings, just a brief note from me.

As value investors, we consider it our primary task to gain a deep understanding of the companies we (might) want to invest in. This begins with a visit to the company’s website, where we get an initial sense of their products, strategy, and future vision.

However, we must remain critical, as companies often present themselves in the best possible light; in a sense, they’re trying to sell themselves.

The only largely objective information we can rely on is in the financial statements.

“If you get interested in a company and you read the annual report, you will have done more than 98% of the people on Wall Street.” - Jim Rogers

And if you read the notes alongside the numbers, you’re likely in the top 1%.

The next step is to analyze the management and any reference shareholders. Here, we look at the leaders’ track records: what have they accomplished in their careers? How long have they been with the company, and how much experience do they have in the industry? This gives us an indication of their commitment, expertise, and ability to lead the company long-term.

Then we dive into the sector in which the company operates and conduct a competitive comparison.

Factors like customer satisfaction, supplier relationships, and internal company culture can now be measured quickly and efficiently online – something that used to take weeks of research.

The danger today is not a lack of information but an overabundance. As investors, we must become increasingly skilled at identifying essential information and distinguishing it from noise.

When we have a clear picture of the company and its market position, we use all collected data and projections to attempt a valuation.

Of course, we focus on companies we believe are undervalued.

We start with relative metrics, such as price-earnings ratios, price-book ratios, and EV/EBIT, comparing these to competitors and the company’s own past performance.

Only then do we move to other valuation methods, like discounted cash flow (DCF) or reverse DCF. We also look at the reproduction value—that is, what a competitor would need to spend to set up a similar company. We further apply the EPV (Earnings Present Value) by Greenwald and Graham’s formula. Each method has its own value, depending on the type of company.

Although this process can be intensive, it gives us the clarity and certainty we need. If a company proves to be too complex or opaque, we simply place it on the “no” pile. 

“I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” - Warren Buffett

In other words: seek simplicity and clarity. There are plenty of opportunities in the market to choose companies that are understandable and analyzable.

“You don’t get any extra points for the fact that something’s very hard to do.” - Warren Buffett

To close, one more quote that emphasizes that we shouldn’t oversimplify either:

“Make things as simple as possible, but no simpler.” - Albert Einstein

Next Tuesday, I’ll be doing another 3P check—this time on Meta (Facebook) following a discussion on X.