IDS series links:
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More
Last week, I finalised the presentation and analysis of the Investment Decision System and I realized that this system (or machine) could actually be summarized in one simple chart. Of course, you might need to refer to the details presented over five posts, but the chart offers an easy and quick way to refer to the IDS when selected investment targets – and make sure you don’t forget anything. Einstein once presented the five ascending levels of intellect as follows: smart, intelligent, brilliant, genius, and simple. Although I’m not pretending to be anything close to Einstein’s highest level of intellect, the IDS chart below is an attempt to simplify the concept neatly.
Simply put, the IDS is a machine created to produce returns. Machines exist to add value and similarly each step (or part) of the IDS machine tries to add some more value along the way. The IDS is fundamentally trying to answer two questions: 1) Based on the information on hand today, is the company undervalued by the market at a large enough discount? and 2) Will the company perform well in the future? That’s basically what every investor is trying to find out.
The below illustration is one more tool to easily refer to when investing. The chart includes a few examples to better illustrate what is presented, but as mentioned several times in the past, make sure you adapt your IDS to your needs. Also, stay flexible and keep improving on it!
Click here to enlarge: IDS Chart (PDF)
Featured image: Magnificent view from my flat in Hong Kong – November 2017
Next post, next week!
Keep growing your snowball!