“Investing is most intelligent when it is most business-like”. The quote above is a piece of wise advice from Benjamin Graham, mentor to billionaire investor Warren Buffett. It has also been something which Buffett had really taken to heart. Ever since Buffett came to know of Graham, he had begun to view a share as a small piece of a business and his framework for making buying decisions – whether it’s to invest in 5% of the shares of a publicly-listed company or to buyout an entire private company – is the same. And for that framework, we can turn…
“Investing is most intelligent when it is most business-like”.
The quote above is a piece of wise advice from Benjamin Graham, mentor to billionaire investor Warren Buffett.
It has also been something which Buffett had really taken to heart. Ever since Buffett came to know of Graham, he had begun to view a share as a small piece of a business and his framework for making buying decisions – whether it’s to invest in 5% of the shares of a publicly-listed company or to buyout an entire private company – is the same.
And for that framework, we can turn to Robert G. Hagstrom’s book on Buffett, “The Warren Buffett Way.” There are, in essence, three questions that Buffett always asks himself when he’s looking at a company:
- Is the business simple and understandable from your perspective as an investor?
- Does the business have a consistent operating history?
- Does the business have favourable long-term prospects?
Let use Thai Beverage Public Company Limited (SGX: Y92) as an example for how the three questions can be tackled.
Thai Beverage is in the business of manufacturing and distributing food and beverages (the latter consists of both the alcoholic and non-alcoholic variety; most of the company’s business comes from the alcoholic beverages segment at the moment).
The company manufactures some of its products, like its Chang Beer brand of beers, while outsourcing the manufacture of other products, like frozen foods. Thai Beverage then distributes both its own as well as third-party products to retailers of various varieties.
So, to answer question 1: Given the aforementioned business model for Thai Beverage, it’s perhaps fair to say that the company’s business is simple and understandable.
Thai Beverage has had an impressive track record. Between 2003 and 2014, the company has never made a loss and has achieved returns on equity of between 15% and 40%.
With such figures, Thai Beverage does have a consistent operating history.
There are three areas of growth for Thai Beverage.
The company does business predominantly in Thailand today (the country’s the source of nearly 95% of the firm’s total revenue), a country that happens to be one of the fastest growing in Southeast Asia.
As the country’s economy grows, the capacity for private consumption from its people should grow as well. That’s a tailwind which Thai Beverage may be able to ride.
Thai Beverage has also been investing heavily on growing its international presence, especially with its alcoholic beverages. In fact, the company has an aim to grow revenue from outside Thailand to more than 50% of its total revenue by 2020.
Lastly, the company is also increasing the range of products it’s selling in Thailand. Thai Beverage has had a history of success with that as it was selling only alcoholic beverages in the past. Now, Thai Beverage distributes other products such as non-alcoholic beverages and frozen foods.
An even wider portfolio of products, if successfully implemented, may just be the third leg of Thai Beverage’s growth-stool.
Pulling it all together, Thai Beverage seems to have aced the three questions Buffett would ask about a business.
However, investors should be aware that the business tenets comprise just one segment of Buffett’s investing analysis. He’d also look into other areas, such as valuations and the company’s financial strength, before any investment decision is made.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.