Excellent in-depth article on the topic of "Capital Allocation".

Very useful stuff for individual investors also in judging the Management quality.

icgn.org/capital-alloca…
Good overview. ⬇️ Image
Investor perspective ⬇️ ImageImage
Article gives a comprehensive view from both the Company's & Investor's perspective on how Capital Allocation decisions can be judged and how they can be improved from a Corporate Governance and Communications point of view.
In my experience, these are the commonly seen issues/results from incorrect Capital Allocation decisions.

1. Organic growth : Companies not identifying opportunities and not allocating well to R&D and (Growth/Maintenance) CapEx to sustain or strengthen the competitive position.
2. M&A : Overpaying for acquisitions (Empire Building, wrong strategic acquisitions...) and eventual value-destruction in most cases.

3. Debt : Over-leveraging the Balance sheet (when metrics like Debt/EBITDA are already high) to the detriment of Shareholders in many cases.
4. Dividends : Continuing to pay them (fearing Investor community reaction) even when they can't be covered by cash flows and thereby financing them by reaching into Cash balances or issuing new debt.
5. Stock Buybacks : Doing them only when the Business confidence and stock price are high. Doing them only for the sake of reducing share count (while not being compared to other opportunities), to boost EPS and meet Executive Bonus targets.
Right now, there's too much focus on stories and hype, but in normal times, this is what investors should focus on. If Management is making the right Capital Allocation decisions to sustain the Business and also make it stronger for the future.

/END.

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More from @RamBhupatiraju

23 Dec
On Seeking Alpha, "Integrator" (not sure about Twitter presence) is one of my favorite authors along with
@FromValue
@andrescardenal
@EconomyApp
Bert Hochfeld
👏👏

Few of my fav articles of his.

1⃣ The 5 Elements That Make For An Outstanding Business

seekingalpha.com/article/435687…
2⃣ On Lessons from Buffett.

-Seek Economic Moats in any investment
-Having an awareness of your circle of competence
-Investing for the ultra long term
-Take advantage of a bargain hiding in plain sight
-Preservation of Capital, Above all

seekingalpha.com/article/436733…
3⃣ 5 Common Mistakes In Evaluating High-Growth Companies

-It has already gone up so much.
-Fearing short interest
-Fearing future Competition
-Fearing stock dilution due to secondary offerings
-Fearing current losses

seekingalpha.com/article/437064…
Read 10 tweets
23 Dec
Learning Market history & correlations/lessons within is important for long-term success.

Nice article with historical perspective of US Mkts (from 1970s) & some long-term lessons. (Ignore the promotional parts by the author).

@saxena_puru @Gautam__Baid

markskousen.com/seven-golden-l…
LESSON #1: Government policy can greatly affect your investment portfolio, for good or ill.

LESSON #2: Bull markets climb a wall of worry.

LESSON #3: Don’t fight the Fed. Adjust your portfolio when money is tight, and again when money is easy.
LESSON #4: Gold is money and the best insurance against an inflationary future and bad government policy, but don’t go overboard buying gold. (Not for everyone, but the author mentions that it should be done only as insurance. I guess Bitcoin is the proxy for it these days).
Read 8 tweets
22 Dec
Two phenomenal articles by @mastersinvest on "Fighting the Fade". 👏

cc: @Gautam__Baid @dmuthuk

1) On limitations of traditional DCF & other analysis (that assume low terminal growth & mean-reverting) when it comes to exceptionally durable businesses.

mastersinvest.com/newblog/2020/1…
2) Reasons for the fade (of weak/mediocre businesses) and some characteristics of extremely durable and long-term compounding machines.

mastersinvest.com/newblog/2020/1…
My fav points from Part1. 👇 Image
Read 7 tweets
20 Dec
Thanks Irnest. My investing philosophy is that we need to start with good first principles/frameworks like the ones in that document, but then adapt it to the current Business/Market environment.

Few random thoughts on this in the thread below.
-Valuing CO's that are going for growth instead of Profitability when there's lot of opportunity to be captured yet.

-Intended lack of Profitability (in many cases) causing over-valuation of (or negative) Earnings based metrics.
-Co's investing mainly thru Income statement (R&D, S&M) to grow and create value rather than Balance sheet (Hard Assets, CapEx)

-Importance of Intangibles and other metrics not captured by Accounting (Mgmt Quality, emerging Moat, Culture....)
Read 5 tweets
20 Dec
Pretty good and simple document on Research Methodology used by Davis Funds. 👏

✔️Characteristics of great businesses
✔️Evaluating Management
✔️Ideal way of valuing Businesses (Owner's Earnings) ✔️Selling discipline

cc: @Gautam__Baid @dmuthuk

davisetfs.com/documents/ETFR…
Good Flowchart.

Bottom-up analysis of Companies, while being aware of Top-down (Trends/Views) is extremely important these days.

davisetfs.com/about/investme…
Methodology. Many similarities with the frameworks of Buffett, Chuck Akre, Terry Smith etc..
Read 6 tweets
18 Dec
Time for a Scorecard📊and thesis📑updates for purchases done in Feb/Mar 2020. Last review done in late April. How far things have come since then.😯

Not taking any drastic actions, other than few sells in fully valued, slower growth Co.'s.
Events since then
✔️Co's reporting two Qtrly reports
✔️Accelerating growth for few sectors
✔️Understandable problems for few others
✔️Crazy run-ups & valuations in the last 9 mo's, supported by biz growth in some cases, but mostly due to Monetary factors & Investor enthusiasm...
I usually buy for two scenarios

1⃣Leading Co's within strong secular trends, that also have strong Management Teams and solid Financials (Rev growth, Profitability or improving Margins/FCF prospects, no balance sheet risk...).
Read 13 tweets

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