Pitch The Perfect Investment (Paul D Sonkin and Paul Johnson, 2017)

• Value of an asset
• Cash flow by operation
• Value of increment growth
• Value of competitive advantage
• Value of invested capital
• Cash flow by selling the asset
• Liquidation value
• Private market value
• Valuation component
• Cash flow: stability is preferred.
• Timing: the quicker to get money the better.
• Duration: the longer the money that will last the better.
• Magnitude: the higher amount the better.
• Growth: faster growing cash flow is preferred.
• Uncertainty: the deviation (estimates) of future cash flow, greed and fear.
• Company specific uncertainty
• Financial
• Competitive
• Management
• Operational
• Size
• Industry specific uncertainty
• Cyclicality
• Regulatory
• Competition
• Country specific uncertainty
• Political
• Currency
• Economic
• Time value of money: present value (PV) vs future value (FV), on the rate of return.
• Equity risk premium
• Sentiment
• Interest rates
• Marco
• Risk free rate
• Macro
• Interest rate
• Owner earning (not EBITA) = net income + depreciation & amortisation - maintenance cap-ex
• Capital Asset Pricing Model (CAPM): Expected return = risk-free rate + stock’s beta (expected market return - risk-free rate)
• Beta is a measurement of volatility and cannot depicts the risk of a stock.
• Excess return = return on invested capital (ROIC) > weighted average cost of capital (WACC) 
• Excess return will attract competition.
• 4 competitive advantages
• Customer-facing
• Search cost
• Switch cost
• Customer captivity
• Production
• Proprietary production technology
• Structural cost advantage: lower cost of input or unique resources.
• Distribution network
• Efficiency
• Learning curve
• Economies of scale or scope
• Network effect
• Government policy
• Competitive advantage is the company’s ability to generate excess return while sustainable competitive advantage is its ability to generate excess return over an extended period of time.
• Search cost and switch cost cannot undermine the higher cost from competitive advantage.
• Increased incremental value = real return on incremental investment (ROIIC) > WACC
• Growth with an ROIIC equal or below the WACC is worthless or will destroy value.
• Investment management is a negative sum game which is worse than zero sum game because of the fees.
• Rules of market efficiency (to generate alpha)
1. All available information has been disseminated to a sufficient number of investors.
• Information must be available and observed.
• Public, private, quasi-public information.
2. The information is processed by a sufficient number of investors without any systematic error.
• The group must have an adequate amount of domain-specific knowledge.
• The crowd must be diverse.
• Investors must act independently of each other.
• Scott Page’s diversity prediction theorem can be applied.
3. The information is expressed and thereby incorporated into the market price by a sufficient number of investors trading the security.
• Investors cannot face significant impediment to trading.
• Individuals must have incentives.
• Heuristics and cognitive bias
• Representativeness: judge the event by matching experience and ignore base rates, sample size or randomness.
• Availability: estimate the likelihood and how easy it is to remember similar past.
• Anchoring: rely too heavily on a single piece of information while ignoring all other relevant information.
• Outperforming the market
• Informational advantages
• Steinhardt framework
• Analytical advantage
• Trading advantage
• Mismanaged uncertainty and risk will misprice a stock value.
• Buffett and the Pepsi challenge let Berkshire Hathaway make an easy $10m by insuring their $1b game with extremely low odds of winning.
• (Expect) Rate of return formula = (ending value / beginning value) ^ time - 1
• Accuracy is how near the hits to the target while precision is how close the group of hits are.
• Schemas are used as a framework to quickly filter out poor investments.
• To determine if it passes the valuation and fundamental criteria.
• Using qualitative and quantitative criteria.
• There will also be a subjective criteria and objection criteria.
• Communication
• Mosaic theory: doing due diligence to determine if a company is investable.
• Toulmin method: argument with claim, grounds, warrant, qualifier, rebuttal, and backing. 3 fundamental parts: the claim, the grounds, and the warrant.
• Evidence 5 characteristic: relevance, accuracy, adequacy, credibility, representative.
• 30-second hook or elevator pitch.
• Two-minute drill.