What Does This Company Do - Understanding a Business and its Risks

[Farid]

What Does This Company Do?: Understanding a Business and its Risks | 173 | Drago Dimitrov | 2022 | ", |

Are you pursuing a career as an investor? Or perhaps you like to do some investing on the side?

Either way, you've realized that 99% of the time, identifying a good investment involves identifying a good company. But what makes a good company? What kind of information do you need in order to make such an assessment?

In this handbook you'll find what's missing from a traditional education in Finance and investing...

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There is much material out there on the quantitative aspects of investing, including Discount Cash Flow (DCF) modeling. You take some numbers, plug them in, and get a valuation number on the other end. While such tools are useful, they are merely explanatory vehicles for showcasing your pre-existing, underlying assumptions about a company, rather than helping you discover something new.

In other words, a DCF analysis is good for explicitly showing others what you already believe about the company's growth rate, discount rate (risk of cash flows), and expected future profitability. But how do you determine what you should believe in the first place?
DCF gives you an output, but tells you nothing about how to determine your inputs...

How are you determining which growth rate to use? What are the subcategories of risks that build up into your discount rate? How reasonable are your estimates for financial projections?

All of these boil down to your understanding of the business and its risks , as well as identifying how each aspect of the company you're looking at is either similar or different to that of other companies.

But where do you start with this exercise of comparison? What questions should you be asking?

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I began my investing career after attending a top university, where I thought I would be fully equipped to analyze the gamut of investment opportunities. During the first couple of years in the "real world", I saw that, despite being armed with many approaches for how to think, paradoxically I still needed some framework for what to think, or at least what to look for, so that I'm not reinventing the wheel with each new deal.

This early career knowledge gap is what separates experience from the individual with experience has seen a wide variety of situations, noticing predictive patterns and creating a mental model that makes analysis of future opportunities more efficient and effective.

The kinds of questions portfolio managers asked me during investment committee meetings couldn't just be learned in a book.... or could they?

Through making investments in hundreds of companies across 35+ industries, I noticed that there were underlying patterns and "rules" in the investment process that most seasoned professionals intuitively understood yet never verbalized explicitly.

"What does this Company do?": Understanding a Business and its Risks is the handbook I wish I had during my first couple years on the job.

This handbook will provide you a high-level structure for investigating the qualitative aspects of any business model, saving you much of the painful (and, at times, embarrassing) trial-and-error that comes with experience.

My hope is that the ideas contained within this guide can accelerate your learning curve upfront and serve as a useful reference for years to come.

-Drago

Contents of Download:
WhatDoesThisCompanyDo.epub (641.69 KB)


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