Going through my old notes I came across this gem on Value Chain Analysis and competitive advantage from Lukasz Tomicki's appearance on the Investing City Podcast back in 2020. Below is my summary (pardon the formatting it was laid out for Twitter):

Hard to find good value in the tech sector – valuations are stretched (episode aired Feb 2020)

Technology by itself is not a competitive advantage

Competitive advantage – something that allows a company to earn & sustain high rates of return over a long period of time

Which competitive advantage is the strongest? Depends on combination of how high return is & how long it lasts

4 Competitive Advantages

1 Intangibles – brands, patents, licenses, government approvals

2 Network effects – product or service becomes more valuable as user #’s grow

3 High switching costs – arise when it’s risky, expensive, difficult, time-consuming to change suppliers

4 Sustainable cost advantages – tied to unique business process or scale

Value Chain Examples:

You can’t simply run a screen to find new ideas – it leads to the well-known parts of the market

Need to go where others aren’t, where they don’t accept there’s a competitive advantage

He likes to think through the players involved with delivery of a product or service & figure out where the competitive advantage exists

The following diagrams are 3 value chain analysis he runs through and where he believes the best value is from an investing standpoint. He prefers a company with pricing power, where they're selling an input that makes up such a small percentage of the total cost of the finished product that they can double or even triple the cost of their item without the buyer batting an eye.

He's trying to find where there is a network effect, economies of scale in the value chain

In order to have high profits you need relatively high price or relatively low cost

Need something special on cost side or revenue side

Cost advantage

1 High fixed cost relative to total cost = market with only a few players but existing players likely to have sustainable cost advantage blocking new competitors

2 Unique process – doing something unique where others don’t want to or can’t copy you. Example given – restaurant where kitchen takes up less floor space than competitors – cost advantage on square foot basis

Most company’s with competitive advantage will generate higher willingness to pay – provide value to end customer & be difficult to replace e.g. railroad

Being a crucial part of value chain but at a small part of total cost

Local oligopoly – relatively bulky, difficult product to transport (e.g. aircon, salvage yard)

Person making purchase decision is not the one paying e.g. car mechanic buys parts based on speed not cost & passes on cost to you – professional services

IP

Deep integration – leads to long-term customer relations

Best business he’s seen

Small tax on a very big pie & being able to grow your business with very little incremental capital

Mastercard & Visa

Others – Christian Hansen, Atlas Copco

His edge - doesn’t spend a lot of time trying to predict future but instead what is occurring now

Look at what is not going to change in the next 5yrs & you’re more likely to find sustainable value creation

Examples: high regulatory barriers to entry, high capital requirements, important brands, consumer preferences = more sustainable sources of profit

Believes healthcare structure in U.S. is unlikely to change much in next 5-10yrs

5 largest insurance companies will still be around in next 10 years

One person’s cost is another person’s revenue

Daily habits:

Think long-term & ignore short-term news

Aim to be evidence based

Investing success comes down to how you act over time & put together a portfolio vs 1 or 2 brilliant insights

Episode 56 – Lukasz Tomicki: Value Chain Analysis - The Investing City Podcast

https://www.investingcity.org/podcast/episode/3825d2a4/ep-56-lukasz-tomicki-value-chain-analysis

I came across the following last night: Buy-Side vs. Sell-Side Analysts: What’s the Difference? (investopedia.com)

I thought I knew the difference but thought I'd check it out to make sure. In essence sell-side analysts tend to work for brokers and their research tends to have more depth to it - they dig deeper - and they can conclude that a company is a strong buy, a strong sell, or anything in between, however there is clearly sometimes pressure from their employer to lean one way or the other - usually towards the "BUY" side, because it's work from these companies that ultimately pays these analysts' salaries.

And buy-side analysts tend to work for funds, where they are trying to put together buy recommendations for their own fund, which of course also involves identifying what NOT to buy, so there is a lot of crossover between the two roles, and buy-side analysts rely in no small part on the research produced by the sell-side analysts at broking firms. The link above gets into a fair bit more detail about the differences between the roles, however, if you're reading a research report or update from a broking firm, that's from a sell-side analyst, but the word "sell" in their job title in no way influences their decision making or makes them more likely to put a "sell" recommendation on a company. If anything, the fact that sell-side analysts are employed by brokers, who do not like to upset potential clients (companies), means there is going to often be some pressure from their own employers to paint companies in a more favourable light. Interesting.

For some great insights into the various pressures that a very successful and legendary sell-side analyst was under throughout his career working for a range of broking houses, check this out (Johnny Mac):

Legendary Analyst John Macdonald on Spotting Company Lies & Calling It How It Is - YouTube

"We had the great privilege of sitting down with John Macdonald, a legendary mining analyst."

"In our conversation we delved into the conflicts of staying true to your views and not being swayed by outside pressures, the common tricks that companies get up to, how he spotted richly valued as well as promising businesses, what the real costs that investors should follow are and a whole heap more."

To skip the ads and go straight to the Johnny Mac interview - click here: https://www.youtube.com/watch?v=HG6W6DlsvyI&t=598s

DISCLAIMER: All Money of Mine episodes are for informational purposes only and may contain forward-looking statements that may not eventuate. The co-hosts are not financial advisers and any views expressed are their opinion only. Please do your own research before making any investment decision or alternatively seek advice from a registered financial professional.

Found this excerpt from Peter Bevelin's book Seeking Wisdom interesting.

If you're playing the game repeatedly do you choose game 1 or 2?

Which game do you choose if you can only play once?

*Hint it's in the section titled Variability.

When Brett Blundy seeks partners in business he is looking for people who align with his “Principles of Ownership”. There are only eight of them. They are simple, sharp and sensible. I think we would do well to think the same way about ASX listed businesses we choose to partner with.

They are listed on the BBRC Worldwide website. I really want to meet Brett Blundy some day…just to learn more about smart business.

“Big businesses grow from small investments (like Lovisa), so our door is always open to a conversation. Our DNA is building big businesses. Along the way, we have learnt a few valuable lessons that we call our Principles of Ownership:

• Return on Equity (ROE); the metric that matters most.
• Debt; it is dangerous.
• Say it Simply; Net Profit After Tax is the measure we prefer
• Blow Budgets Up; BBRC does not need them or look at them.
• Boards; Keep them lean and mean
• Cash is King; Lazy Balance Sheets are not to be.
• Share Options; Understand their true cost.
• Mindset Matters; Executives should have an owner’s mentality.

BBRC Principles of Ownership have held true throughout our investing history since 1980. These principles allow for positive energy, with time spent focusing on making the businesses better. Reach out to us if you would like a personalised copy of them.”