4 M's of Investing

5 minute read

It is 2017, my wife and I decided we travelled enough, it is time to start a family!

We are going to leave the luxury cruise ships, where we visited over 30 countries together at that time, learned new skills, and bringing in more than $1 Million of Revenue in 2017.

By selling Art…..

Yes from the masters like Picasso, Miro, Dali and Chagall to artist like Peter Max, Britto, De Rubies and even sport memorabilia.

But we were doing this by conducting Auctions, and selling in the gallery.

What did I know about investing? Not that much really.

We were just keeping our heads down and grafting (work, work, work).

So in 2018 when we went to South Africa (my home country), we were full of confidence, cash in hand and thinking we can start to invest.

Well we did….or I learned to do it better.

The adventure started…

Quickly started to deploy some capital in long term funds. Like a 5 year lump sum fund (that went bust after the Covid series), a unit trust, and a retirement account, etc

Because it is always better for other people to handle your money, right? NOT!

Trying to buy real estate., but bank wanted 50% deposit, because of our situation.

and we didn't know if we wanted to stay yet…

Even started a company called In The Green, and got T-shirts manufactured that was made from recycled plastic bottles, PET. Pretty cool, Even got an article in a magazine written about the initiative, but…. we lost over $7 000 with that venture (story for another time).

So many other things, too.

But none of this was really a big lesson…..

The Real Lesson Came!

A friend of mine, in fact it was the friend that helped me to get on the cruise ships in 2013, he started a solar company 3 years prior. Great person, but we were at the right place in the wrong time.

The company had, 7 Directors, part time employees all over the country, and sounded like a good investment opportunity.

Because, if you know the situation in South Africa, then you know there are days, or hours with NO electricity in major cities.

No electricity!

Ooo I miss LOADSHEDDING now (they even gave it a name).

It sounded like a good investment!! But again I did not know the 4 M’s of investing….

If I had the knowledge I will share with you now, It would have saved me tens of thousands of dollar.

Easy and simple…

The 4 M’s of investing

Can be used for Private or Public companies. (In future post we will go more in depth with this topic),

Here they are:

1. Meaning

• Does the company align with what you believe, and like?

• Is it something in your circle of competence?

• Can you explain how the business makes money, in one sentence, to a 5 year old?

2. Management

• Are the people running the company, competent in doing so.

• Founder Owners, or owner managers are the best in my opinion.

• If you know them personally, then try and get a second opinion from someone not personally, or emotionally involved.

3. Moat

What is protecting the business, how hard is it to become a competitor and steel your business? This comes from the water around a castle, to protect it from invaders.

There are many moats:

• Price moats - low cost airlines, Walmart or Pep co.,

• Brand moats - Mcd’s, Coke or Adidas,

• Network effect moats - Facebook or WhatsApp,

• Switching moats like banks or phone service providers,

• and many more.

If it is a small business then no need to worry really. Just deliver better service, and treat the employees with systems (people like clear direction so they can do their job well and feel fulfilled)

4. Margin of safety

What price do you buy the company at, after doing a back of the envelope valuation. Probably the most important. Let me explain.

For a Private company it is fair to buy it at 2 to 3 times yearly profit margin, or Price to Earnings (PE)

Example:

• $300 000 a year in Revenue

• $200 000 to run the business

• $100 000 a year in profit ($300 000 - $200 000 = $100 000)

Then you can buy it for $200 000 to $300 00.

Margin of safety would be to buy it at $150 000. Now that is on the low end, so if something goes wrong in the first year then you have downside protection.

Tails I win, Heads I don’t loose much

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For a Public company the PE (Price to Earnings) can be

10 PE on low side, and 20 PE on the high side. (more liquid, easier to sell)

If you can buy it at a 5 PE then there is a margin of safety.

This is just 1 way to look at it, and I can't wait to tell you more stories about investing metrics to use, and how to value a business.

The Lesson reminder

Do the work to evaluate the company, starting with these lessons…

If it looks good then there are more to be done, before money changes hand.

To use the wisdom of Warren Buffet and baseball : We don’t need to swing at every ball, we can wait for the perfect pitch.

Thank you for reading, and keep buying assets!

Stefan