Based on the PACS Principle
P - Potential to Scale
A - Awesome Quality
C - Continuous Compounding
S - Safety

4.2.1B Awesome Quality (Introduction)

Great companies do either the following:

• create better products/services that can do for lower price or same price (value)
• create greater conveniences
• create products that solve real world problems or pain points of customers
• delight customers

Business Models Quality:

1. Blue Ocean
   • create an entire new market solving customers' unmet needs
2. Essential Products/Services & Customer Stickiness
   • products or services that customers/businesses have huge dependency
3. Lumpy or Recurring
4. Scalable
   • franchise/technology/SaaS

4 Things to Consider Before Buying A Business

1. Usefulness of the product
2. Customer mindshare
3. Able to raise prices, if needed
4. Is it hard to duplicate it?

How to Determine the Quality of A Business

Use Social Media to check

• Website
• Facebook
• Instagram
• Youtube

4.3.1 Continuous Compounding

You want a company that can grow consistently year after year.

Avoid cyclical companies such as:

• property developers
• semiconductors
• airlines
• commodity (mining, steel, oil)
• construction machinery

Never invest in the following companies:

• Infrastructure, Real Estate, Cement
• Power/Utility
• Distributor
• Commodity (Agriculture/Paper/Basic Chemicals)

Questions to Ask Yourself:

1. Will this business be around for the next 5-10 years?
2. Will technology disrupt this business?
3. Am I Certain this business is going to grow more in the next 5-10 years?

4.4.1 Safety Introduction

Typical Business Purchase Requirements:

• Operating profit margin > 8%
• ROE > 15%
• Cash conversion cycle < 130 days

Safety is split into 2 Risks:

1. Business Risks
   • Key man risk
   • Customer risk
   • Regulatory
2. Valuation Risks
   • Price Discipline

Key Man Risk
The entire business should never depend on a single individual.

Question: If an important management or team member leaves the company, can the business still operate as usual? or grow as usual?

Example: Tesla (Elon Musk) & Coca-cola (Who?)

Customer Risk
A business should never have a high concentration customers.

How to check Customer Concentration with Edgar
https://www.sec.gov/edgar/searchedgar/companysearch.html
Search for terms like

• concentration
• 10% or more
• more than 10

Regulatory Risk

1. Health related (medicine, sugar drinks)
2. Essential goods (defence, power utility, water)
3. Entertainment (gambling)