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It's the Reinvestment that Counts... - Views on News from Equitymaster
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It's the Reinvestment that Counts...
Nov 1, 2016

Dear Subscribers,

Welcome to the fourth edition of the Phase One Digest.

As always, we thank you for your support and enthusiasm for this service. Our sole focus is to recommend companies that have the potential to multiply your wealth in the long term.

Legacy Moats vs Reinvestment Moats

A business with a competitive advantage is able to earn a high return on the capital employed over the long term.

But these high returns attract more competitors to the market, who then strive to claim a portion of the high profits.

This is why we need to identify companies that can keep competitors at bay longer than anyone else and thus in the process continue to be extremely profitable.

Warren Buffett likes to invest in companies that have some sort of competitive advantage, or what he calls 'moats'.

Base Hit Investing has a useful methodology to classify outstanding companies. It bifurcates them into two groups - legacy moat and reinvestment moat.

Legacy Moat applies to companies that earn strong returns on capital but are unable to find opportunities to employ their incremental capital at similar high rates.

In other words, these businesses have a solid competitive position that provides healthy profits and strong returns on capital. But employing additional capital in their own business is not possible or provides poor returns on the incremental capital.

Reinvestment Moat applies to companies that find opportunities to employ incremental capital at high rates. These are the companies you want to look out for.

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INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
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DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
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  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
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  1. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
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