An investment in knowledge pays the best interest.”
3R of Value Investing
– Right Business Model
– Right Management
– Right Price
What is 3R of Value Investing?
3R concept — right business model, right management and right valuation versus price — to identify good companies.
However, to determine whether a company has the right business model, investors need to have an understanding of how the industry or company operates.
So, investors should grow their own “circle of competence”.
Each investor has his own circle of competence and within the circle are industries or companies they are familiar with.
It is not wise for them to invest in things they do not understand.
If they want, they can slowly learn about the industries they are unfamiliar with, grow their circle of competence and start investing when they are confident.
Let us understand the 3 R of Value Investing
Right Business Model: Choosing the Right Business Model
Right Business Model should have core values, strategic goals to support the purpose, values and goals.
Right business model describes the rationale of how the organization creates, delivers and captures value.
The organization should have business model concept that everybody understands; one that facilitates description and discussion.
The challenge is that the concept of the business model must be simple, relevant, and intuitively understandable.
Defining the right business model requires the same diligence as designing the right product, but the approach and skills required are different.
Right Management: Looking for the Right Management
Most investors realize that it’s important for a company to have a good management team.
The problem is that evaluating management is difficult. So many aspects of the job are intangible.
It’s clear that investors can’t always be sure of a company by only poring over financial statements.
Fallouts such as Enron, Worldcom, and Imclone have demonstrated the importance of emphasizing the qualitative aspects of a company.
Right management is a must to see any business grow so that we can see good growth prospects.
A sound management will always take steps to grow the company; which in-turn benefits the investors.
They can actually make or break the company.
Right instincts and intentions must be one of the major factors when analysing the managements.
Thus, management quality is the key when analysing or picking any stock for long term investment.
Right Price: Understanding Right Price
Finding the right price to pay for a stock or the best price to sell a stock is the way investors and new investors make money in the stock market.
Seems obvious, but like many things in life, it is not easy to do.
The first task is to buy at the right price, but what is the right price?
Different investors will have different answers, but they would all agree that you should buy below what the future price will be.
You may have a better chance coming up with a current fair value price, which is not the same as what the market is paying.
A fair market value or intrinsic value is an assessment of what the business is worth as a going concern.
It considers the company’s ability to generate free cash.
This is money the company can use to fund expansion, buy other companies, pay dividends or simply bank for future use.
A strong free cash flow is an important signal that the company has a competitive advantage over competitors.
How big of an advantage the company has plays into deciding how strong the company’s future looks.
One has to always keep in mind that Top line is Vanity, Bottom line is Sanity and Cash is Reality while analysing any company.
Disclaimer: All the views in the video are personal of the author not attributing to any one
