Introduction:TheQCulture xiiiing about and buying shares in any business without first reading its
annual report or knowing what to look for in it. For every gambling
success story you hear about, there are scores of failures you don’t.
AsThe Wall Street Journalrecently quipped, no brother-in-law has
ever been known to reveal how much money he lost in the stock
market.
The focus on business analysis as opposed to market analysis is
reinforced by the imaginary Mr. Market, created by the twentieth
century’s most astute investment thinker and business school
teacher, Benjamin Graham. Price and value diverge in capital market
trading because the market is best characterized as manic depressive,
mostly either too euphoric or too gloomy. This is contrary to the
popular but mistaken belief that markets are efficient and therefore
accurately price securities.
Once you as a business analyst knowhowto look, the next ques-
tion iswhereto look. The core idea is your circle of competence,
created by the twentieth century’s most successful investor and busi-
ness educator, Warren Buffett. It is defined by your ability to un-
derstand a company’s products and operating context. Circles of
competence are as varied as the investors who must define them. All
investors must grapple with the challenge of using current and past
information to gauge future business performance.
For most people, it is easier to do this with businesses that have
been around a long time, been through lots of business cycles, and
faced economic recessions. Within that group of business are many
whose long trac krecords justify being called classics—well-
established companies with powerful global products and market po-
sitions like Procter & Gamble, GE, Coca-Cola, and Disney. Some of
these will endure as stalwarts, while others will be beaten down (as
GE did to Westinghouse or as Wal-Mart did to Sears Roebuck). The
ability to tell which is which will vary among people with different
aptitudes in evaluating these companies, for different sets of skills
are necessary to understand these various sorts of businesses.
So too will abilities vary with respect to assessing the future per-
formance of newer companies that have been through fewer varia-
tions in their operating climate. These are “vintage businesses”—
those that have been around for a while but which operate in newer
and more dynamic industries that evolve at a rapid pace—companies
like Cisco, Intel, or Microsoft, for example. They have less of a track
record, and may be harder for lots of people to understand. But some