Attention to Detail – August 2019

Strategic Value Investing: Industry Analysis (GuruFocus)

In the world of active management, investors can be easily infatuated by the qualities of a company. A business with healthy margins, high historical growth rates, and a solid balance sheet may stand out as an attractive buy. But as this month’s article points out (link), analyzing a company’s industry can be just as important as analyzing the business itself. Companies are, after all, constrained by the environment within which they compete, so it is important to consider the variables that define a company’s operations. The author points out a few factors to take into account, drawing on Porter’s five forces, the industry life cycle, and Morningstar’s economic moat classifications to highlight the features of an attractive industry. Of course, no single sector checks all the boxes presented, but by understanding where an industry sits on each of the variables, we can better understand a company’s growth potential, and by extension, the risks we face as investors. We are always careful to consider these high-level details when selecting investments; after all, what good is a great company if its operating in a terrible business?

In the attention to details series, we lift the lid on what WDS does behind the scenes to invest well by sharing what we are reading. These are pieces that often articulate different aspects of our philosophy and ultimately our process. Check back regularly for a new article that is worth the read.