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1. Capital Allocation
2. Return on Capital
3. Multiple Sources of Growth
4. Good Management
5. Industry Structure
6. Customer Benefits
7. Competitive Advantages

1. Recurring Revenue
2. Friendly Middlemen
3. Toll Roads
4. Low Price – Plus
5. Pricing power
6. Brand Strength
7. Innovation Dependence
8. Forward Integrators
9. Market Share gainers
10. Global capabilities and leadership
11. Corporate Culture
12. Cost to Replicate

• strong predictable cash generation
• sustainably high returns on capital
• and attractive growth opportunities

• asset turns,
• profit margins, and
• cash conversion.

• Excessively proud management teams indulging in undisciplined acquisition sprees rarely create value for investors
• Another sign of strong long – term thinking is a prudent balance sheet and counter-cyclical investment
• How they handle bad news? A common example concerns the handling of bad news. Some companies obfuscate or delay reporting adverse developments while others promptly and forthrightly disclose them. While often dismissed as a matter of corporate communication or legal requirement, the difference reflects profoundly on relative trustworthiness
• We prize companies that prioritize return on capital. In general, we also like companies that use return on capital to measure performance and influence incentive compensation plans not only for top management but throughout the organization. This tends to indicate a more considered and long – term culture than companies where compensation is linked solely to earnings growth
• Transparency – They do not suddenly announce big cost overruns on their latest information technology or recently discovered kinks in an acquisition made two years earlier

• In any sector, it is important to assess whether competition is as real at the micro-level as it appears at the macro – level. Sometimes what seems to be a competitive market is rather a latticework of smaller monopoly-like structures where all participants extract high profits
• As a general rule, an oligopoly is preferable to a fragmented and volatile competitive landscape. On top of that, we look for oligopolies where the industry structure has been relatively stable over time and where the logic persists for that stability being maintained. Finally, we tend to prefer the leading players in oligopolistic markets – especially in industries where competitive advantages in areas such as R & D and A & P are enhanced by market leadership
• Discounting can be seductive in the short term: it boosts sales, enables companies to hit their profit targets, and even brings gains in market share. But it is dangerously addictive. When companies see that it works once, they are often tempted to do it again. Competitors typically follow suit to protect market share and the industry starts teaching customers to expect persistent discounting. Once that occurs, the industry has trapped itself  [Indian Telecom’s lost decade (2010-20) can be attributed to this]

• Ignored divisions of large companies, which are provided with fewer resources and mediocre managers, cede market share; a good example was Siemens ’ hearing aid business ( now in private equity hands )
• Companies with entrenched cost or management structures that impair adaptability
• An obscure industry, even one with appealing economic characteristics, tends to face lower disruption risk , making attractive industry structures more durable –toilet paper is an example
• Intangible consumer benefits tend to be more prevalent in smaller items or those considered an indulgence – e.g. Apple
• If the failure of a small machine or input component can cause the shutdown of a manufacturing plant , customers will work with only one or two suppliers e.g. AIA Engineering
• A reputation of high quality or reliability is earned over time . To compete with reputation is almost impossible , no matter how much money is staked on it – In addition , large corporations increasingly use procurement departments that enhance rational behavior in corporate buying,Corporate buyers are generally more receptive than retail consumers to the concept of ‘ total cost of ownership ’ . A machine that provides reliability and / or measurable production cost savings can be priced to reflect such benefits

• technology – For products such as these with long lead times , market leaders can harness incremental innovation to deter new competitors (giving example of Pharmaceutical R&D)
• network effects – Example of Network effect – Stock exchanges –stock exchanges having network effort is new to me 
• distribution advantages -When a company’s ability to service or fix a product is vital to customers , distribution can take on a critical role – Truck stuck on highway for repairs is an example,Consequently competing against companies with established service networks can be daunting, as it requires significant upfront costs. If such costs are high enough, they deter competitors

• Service Revenue – service revenue continues steadily through economic downturns as building owners , occupants , and governments put a premium on safety and reliability . Even as new installations fluctuate , the existence of an installed base makes revenue growth relatively -the dominant competitive dynamic is to become the low – cost producer rather than to exploit the value of recurring revenue  –This is what Jio is doing
• Embedded into an automated system can be attractive – STRIPE is a good example for my own website
• Customer Advances – Cash is always more valuable the earlier it is received
• Control Decision makers – Geberit capitalizes on this gap between decision – makers ( the plumbers ) and end customers . Aside from strengths rivals –Like Astral Polytechnic 
• A business that is solely linked to customers ’ capital expenditure makes for a much more complicated investment than one linked to their operating costs -Therefore , we like to focus on flow products with genuine differentiation benefits . The relative attractiveness of flow products versus capex products offers two broader lessons . First , even if companies sell to less cyclical industries , steady revenue streams from flow products are typically more attractive than those dependent on capex
• Companies that don’t rely on government assistance – Why government industrial assistance or protection should be viewed astransient,, no matter how noble or long – term the government’s intentions may seem

1. Innovation must be profitable to make innovation dominance attractive. Not all innovation makes a business better .In many industries , companies must innovate constantly simply to defend their position . When such innovation comes alongside declining margins ( as R & D expenses are not covered by incremental sales ) , a company is engaged in costly cannibalization, not value creation
2. Narrower product portfolios can lead to greater reliance on big breakthroughs. However , even where these big breakthroughs can be achieved , consumer response to them is notoriously unpredictable and so success is not guaranteed . Further , widespread anticipation of big breakthroughs often yields investor exuberance that suppresses investment returns .
3. Incremental innovation generally tends to perform better

• The concept of compounding is one of the most important and valuable ideas in the world of business and investing . Its power is relatively invisible over short periods of time but galactic over long periods of time . Consider an investment of $ 10,000 that earns either 10 % or 7 % annually . During a single year , that amounts to a difference of a mere $ 300 , whereas over a 25 – year period , it adds up to $
• Concentration risk extends beyond customers to include suppliers on the production end , who may charge higher prices , and distributors on the sales end , who may offer lower prices
• Battling short – termism requires cultivating the opposite institutional culture with all relevant participants . This includes educating clients , training staff , and creating an appropriate reward structure for decision – makers at the highest level
• Quality companies often lack this cherished pot – of – gold characteristic: they tend not to have products that promise to revolutionize the world . In fact, many of the best companies are simple businesses that have done what they do consistently for decades
• Nevertheless, modern investors often share a propensity to seek the obscure instead of the obvious, to identify a hot new startup company, an erstwhile laggard poised for a turnaround , or an emerging competitor threatening to revolutionize an industry. Successful quality investing , therefore , sometimes requires avoiding the temptation of apparently exciting investment discoveries . It means accepting the relative dullness of analyzing what is often in plain view

• Optimism is a common source of investing error , plaguing quality investors as much as any other
• Most next – Monday industries and companies continue to disappoint because their infirmities are due to external factors that no management can permanently overcome
• Many investing mistakes arise from an illusion of predictability , which are especially acute in any rapidly – changing industry , such as technology
•  endowment effect – an over-appreciation of things already owned compared to other opportunities . Quality investing is particularly susceptible because the considerable upfront research and extensive winnowing increase the endowment effect

• “For instance , a profit warning is potentially a symptom of deep – seated problems”
• “Firstly , technological changes driving market alterations are often more serious than they initially seem , especially in consumer or retail channels
• Secondly , business downturns from changing economic environments tend to be more protracted than anticipated . Any company forecasting improvements several quarters into the future despite a choppy near term is conveying hope not facts . Few industries go from boom to bust and back in less than 12 months
• Finally , if a company’s customers are getting poorer , the company will soon follow –However Airline part suppliers are continuing to do well 
• “chicanery” Frauding someone such accounting red flags can be powerful indicators that the underlying business is also deteriorating