WallStraits 8 Business Screens

[PassiveReturns]

Since many forumers are originated from the former WallStraits forum, I believe most will remember the 8 business screens of the WallStraits :

1. Consistent historical sales and earnings growth
   
2. Conservative Financing with total debt less than a single year's net earnings
   
3. Consistently high return-on-equity (ROE), > 15% each year
   
4. Intelligent Capital Allocation Decisions
   
5. Business is easy to understand, and Management is open and honest
   
6. 2x5y: Industry sector supports doubling of sales and earnings
   
7. Sustainable Competitive Addvantages are evident
   
8. Attractive Valuation based on Discounted Cash Flow projections
   

[d.o.g.]

I believe most will remember the 8 business screens of the WallStraits

I remember them, and I also remember that they did not help the Wallstraits Intellivest Portfolio when the downturn came.

One way to improve upon them is to filter for critical failure points in the business e.g. pricing power, predictability of sales, supplier/customer dependence, financing dependence, negative cashflow etc. If key weaknesses can be identified, and it is not clear how the company can mitigate them, the company should be avoided. At the very least, the position size should be reduced.

In this way some of the mistakes in the Wallstraits Intellivest Portfolio could have been avoided:

Bright Orient - no pricing power
Celestial Nutrifoods - no pricing power for soybean business
China Aviation Oil - loss of monopoly
China Paper - no pricing power
Creative Master Bermuda - no pricing power
FSL Trust - share price dependent for fundraising
Oriental Food - no pricing power
United Food - no pricing power
Westcomb - no recurring revenue

[BlackCat]

Most problems from 'no pricing power'... I think WS was only paying lip service to their 'Sustainable Competitive Advantage' screen.

[yeokiwi]

5. Business is easy to understand, and Management is open and honest.

WS seemed to have failed the above criteria badly. They visited the companies, talked to the management and yet, some of their companies were involved in fraud or debt problems.

Celestial Nutrifood
JEL

I think, if Curtis was more acceptance to the views of many WS forum members, WS should be able to survive.

Did anyone here put in money into WS for investment?

[Musicwhiz]

Interesting , I never actually saw the 8 screens because I only joined Wallstraits around 2007; I understand the forum started as early as 2003. It's fascinating because after all these screens were originally devised by Curtis Montgomery, himself quite a well-known value investor then. It was a sad thing that these 8 screens were not sufficient to buffer the portfolio against the downturn, and also to help avoid the two scandals with Celestial and JEL recently. From what I've read, perhaps I can comment on some of the screens:-

4) Intelligent Capital Allocation Decisions. This is pretty subjective, I must say. The proof is in the pudding, as the ROE and FCF can show if a company has intelligently allocated capital, and whether it is able to compound it consistently.

No. 5 is also tough to implement as Management can sometimes be a "smiling tiger" or they may "smile yet hide many daggers" as the saying goes in Chinese. You never really know about the skeletons in the closet till it's too late, but maybe Wallstraits should have included something on margins to justify purchase decisions. For industries where commodity products are rampant, net margins cannot be sustainably high for long periods of time, or else it would probably invite suspicion.

I think point 6 on industry supporting doubling of sales and earnings is also not a good screen. Some companies can achieve this for a couple of years but will invariably slow down as competition catches up and scale kicks in (harder to grow as you get larger). Perhaps a more conservative stance of 30-50% growth in sales and 15-20% growth in earnings over 5-7 years is a better indicator?

Sustainable competitive advantages should always be reviewed time and again to see if they are still present. If a competitive moat is eroded, it's best to take action to either sell out or reduce your position accordingly.

[kazukirai]

Regarding JEL, correct me if I'm wrong but I recall reading a reply in either the Afralug/Wallstraits forum that mentioned Curtis divested from JEL after becoming, and subsequently stepping down as an ID there. So he must have found that the management wasn't entirely honest. I think it was also mentioned that the WS stake in JEL was profitable at time of divestment.

Anyone else can remember something like that?

[FFNow]

MW, you can read up about the 8 screens from his book: "How intelligent investors build a perfect portfolio : 8-steps to selecting superior businesses"

[Musicwhiz]

MW, you can read up about the 8 screens from his book: "How intelligent investors build a perfect portfolio : 8-steps to selecting superior businesses"

Hi Taka666,

Thanks, I realize I have that book!

[cookieguy]

8 business screens sounds interesting. thanks for sharing.

but if you can kindly allow this little cookie to share my humble thoughts on this point:

(a) management is open and honest
---> as much as we understand them, there is always an element of "daggers" within them that we do not know. We always have market predators out there whom might be in turn be the "management" themselves. Even if they score well in the GTI (Government Transparency Index - measures corporate governance), does that mean they are completely truthful to the shareholders? We could cast a perceived assumption upon our own judgement whatever decisions the management made; that said, our views may be re-enforced if you meet and speak to them during AGM to strengthen our thoughts. However, we might want to take the management analysis and actions as a pinch of salt. Today, they are the good guys, tomorrow beyond certain circumstances, they may be viewed as the baddies. Never easy to sit at the top and be judged always being the CEO. The price to pay - high pay packet. For retail investors, either we "buy" their story or reject. Your call. My personal opinion - believe in yourself to trust the mgmt.

[rbeggy]

That is also what I've heard. There are issues about fraud inside the company. I think this is the most common problem to any business.