We’ve just been listening to a great interview with Seth Klarman’s protégé David Abrams on the Value Investing With Legends podcast in which Abrams discusses why investors need to use a multi-path approach to business valuation and analysis. Here’s an extract from the interview:
David Abrams: The first question we always ask in any analysis is – what’s the risk? So, is it the kind of asset where you could lose all your money if things go badly. Is it the kind of asset where you could lose a little bit of money. Is it the kind of asset where you know you’re going to make money. Then once you do that, the question is, this is what the upside is and is the return commensurate with that. We look at such a wide array of things. We look at credit. We look at equities. We look at companies that are growing. We look at companies that are stable. Sometimes the companies that are shrinking.
For each one you need to… there are different mental model. If I have a company that’s growing. I think the question is, how fast is it going to grow? What could make it not grow? Some of the business dynamics we were discussing before. If it’s a pretty stable thing. What are some of the things that could make it not stable? What could make it do better?
You’re trying to think about the multiple paths that could happen. There’s not one path that can happen in the future. When you look back there’s one path that happened but that doesn’t mean that going forward there’s only one path. In the future there’s multiple paths. You need to have in your own mind the range about what that could be.
You can listen to the entire interview here:
(Source: Value Investing With Legends)
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