October 30, 2024 | Listen Online | Read Online | | Value Investor Daily #55 Guy Spier: A Framework for Evaluating Business Quality with Simon Kold |
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| Welcome back! | Guy Spier recently did a fascinating interview with new fund manager and author Simon Kold. | Today, we're unpacking Kold's tactical strategies for identifying strong moats and resilient companies. | With his unique background in comedy, theology, and investing, Kold builds a framework that values both measurable data and qualitative factors. | Kold's mix might sound unconventional, but it's like having your portfolio blessed twice—once with logic and once with good karma. | Simon Kold's Investment Framework: 8 Key Insights | 1. 🧩 Seek Consistency in Leadership | Look for companies with CEOs and key executives who have been around for 10+ years. Berkshire Hathaway under Warren Buffett and Apple under Tim Cook are prime examples of consistent leadership contributing to long-term success. Consistent leadership often signals a passionate leader who will persevere through tough times. | 2. 📊 Break Down Your Investment Thesis Into Logical Hypotheses and Test Them | Epistemology is the study of knowledge acquisition. Kold applies it to investing. Break down your investment thesis into a set of logical assumptions (e.g., market growth, product demand) and actively seek evidence to challenge each one. Here are some vital assumptions to test: market growth, competitive landscape, switching costs, and product demand. Ask real customers why they keep using the company's product or service over time. | 3. ❌ Be Wary of Authority-Driven Investments | Just because a big-name investor backs a stock doesn't mean it's a smart choice for you. Dig into the specifics and ensure the fundamentals align with your investment checklist and risk tolerance. Think of yourself as a detective—don't just take assumptions at face value, even if they come from an 'all-knowing' guru. Avoid blindly following assumptions, even from "credible" sources. Learn from Buffett, Ackman, Spier, and others, but do the homework. | 4. 🔗 Network Effects Cut Both Ways | A network effect will have a collapsing impact if it ever breaks down. So, you need to understand the strengths and weaknesses of network effects inside your companies. Will the network gain in value in the future, or are its best days behind it? Is this a shopping mall network effect or a Google network effect? If you were a user, would you stick around or jump ship when a shiny new technology comes along? | 5. 🔄 Watch for Multi-Homing Risks | How easily can users engage with multiple networks? Assess how easily users can switch platforms in two-sided markets like ride-sharing (e.g., Uber vs. Lyft) or vacation rentals (e.g., Airbnb vs. Vrbo). In the case of Uber and Lyft, it takes just seconds to open both apps on your phone. Frequent multi-homing by users (using multiple networks concurrently) erodes a company's network advantage (profit margins) over time. | 6. 🕹️ Look for Industry Standard Tools to Uncover Hidden Network Effects | Products used by professionals (e.g., Adobe, Microsoft Excel, Intuitive Surgical) tend to have strong retention due to job-specific skill dependencies. Confirm that customers rely heavily on these tools to indicate lasting demand. New users will be forced to learn the defacto standard tool, enhancing the portability of the network effect from old to new users. | 7. 📱 Brand Identification and Generational Portability | For identity-driven brands like Harley-Davidson, check for signs of brand transferability across generations. For example, Harley-Davidson riders often join local and national clubs and even participate in annual rallies, showcasing deep emotional loyalty and commitment to the brand. But will Gen Z do the same? It's showing little to no sign they will embrace the brand the same way. | 8. 📈 Watch out for Excessive Price Increases | Is the company investing in its products or just milking its brand for higher and higher prices every year? For brands, especially non-luxury, review their price increase history. Excessive or frequent price hikes may erode brand loyalty if consumers feel overcharged with little to no product or experience improvements. The company should leave plenty of consumer surplus on the table. Costco, for example, makes its money on memberships while capping the upside margin on the goods it retails. They could easily charge more for nearly everything in their stores, but they don't, on purpose. | The interview covered much more. Be sure to check it out to learn how to evaluate company quality. | Kold's method involves stripping away assumptions and focusing on durability, which is critical for long-term value investors. He reminds us that investing isn't just about crunching numbers; it's about understanding the business's durable qualities (or lack thereof) from multiple angles. | Guy Spier also highly praised Kold's new book, saying that if you only read one book in the next year, make it this one. Check it out now. |  | Amazon |
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