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:
- Blue Ocean
- create an entire new market solving customers' unmet needs
- Essential Products/Services & Customer Stickiness
- products or services that customers/businesses have huge dependency
- Lumpy or Recurring
4 Things to Consider Before Buying A Business
- Usefulness of the product
- Customer mindshare
- Able to raise prices, if needed
- Is it hard to duplicate it?
How to Determine the Quality of A Business
Use Social Media to check
4.3.1 Continuous Compounding
You want a company that can grow consistently year after year.
Avoid cyclical companies such as:
- property developers
- commodity (mining, steel, oil)
- construction machinery
Never invest in the following companies:
- Infrastructure, Real Estate, Cement
- Commodity (Agriculture/Paper/Basic Chemicals)
Questions to Ask Yourself:
- Will this business be around for the next 5-10 years?
- Will technology disrupt this business?
- 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:
- Business Risks
- Key man risk
- Customer risk
- Valuation Risks
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?)
A business should never have a high concentration customers.
How to check Customer Concentration with Edgar
Search for terms like
- 10% or more
- more than 10
- Health related (medicine, sugar drinks)
- Essential goods (defence, power utility, water)
- Entertainment (gambling)