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Sunday Briefing: On averaging down, how to think for yourself, and the difference between moats and durability

Sunday Briefing: On averaging down, how to think for yourself, and the difference between moats and durability

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Welcome to the Sunday Briefing newsletter where we share some of the interesting lessons in life, business, and investing that we’ve come across during the week.

Latest on Junto

Two days ago, I published a 6,100 words deep dive note into a Chinese company by the name of Momo Inc. And like our other company notes and anything related to the specific investment decisions we make, it’s restricted to Junto members. You can learn more about the Junto membership and the additional benefits of joining the greatest value investing membership on the internet here.

We look to partner with like-minded investors who are interested in a patient, long-term investment approach that is rooted in the principles of value investing. If that sounds like you, I hope to welcome you aboard!

What we’ve been reading

When do you average down?A great post by John Hempton at Bronte Capital about when to recognize whether averaging down might turn out a great idea or a great disaster. John lists two key points about the business that makes it safer to average down on an investment.

  1. The company isn’t highly leveraged—financially nor operationally.
  2. The business is not at risk of obsolescence.

Whilst I think that someone asking me (as per the last blog post) for a valuation on every stock is absurd, I think it is entirely reasonable for them to ask “under what circumstances would you average down”. If you can’t answer that you probably should not own the stock. I should insist on it with every long investment.

How to think for yourself.

Because the independent-minded find it uncomfortable to be surrounded by conventional-minded people, they tend to self-segregate once they have a chance to. The problem with high school is that they haven’t yet had a chance to. Plus high school tends to be an inward-looking little world whose inhabitants lack confidence, both of which magnify the forces of conformism. And so high school is often a bad time for the independent-minded. But there is some advantage even here: it teaches you what to avoid. If you later find yourself in a situation that makes you think “this is like high school,” you know you should get out.

The difference between moat and durability.

For example, I would put Costco (COST) in the “low durability” category and yet also in the “wide moat” category. Costco has a strong competitive position. However, offline retail has serious risks to durability within even just the next 5 years. On the other hand, there are plenty of commodity type products (like steel) that have high durability as a product and yet no moat at all for many of the individual firms.

Quote of the week

Li Lu on the circle of competence.

What exactly is a circle of competence? What counts as something you really understand? When the market is in turmoil and everything you own has lost money while everything everyone else owns has made money – how do you know you’re right and they’re wrong? This is why it is not easy to establish a circle of competence, nor to answer the two questions I just posed.

A thought

Always under-promise and over-deliver. Such a simple trick in life. People who keep doing the opposite show lack of temperament.

Have a great coming week,
Oliver Sung

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