Circle of Competence - A Discussion

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(16-10-2012, 11:06 PM)BlackCat Wrote: Hi MW,

Quote:Currently I am working to understand retail and luxury goods better...

For luxury goods, I found Richemont's transcripts informative and entertaining, especially the CEO's Q&A sessions. Attached were the ones I could find. You can also get the book 'The cult of the luxury brand' from NLB - easy reading.

I like the luxury market because there are a usually a few big players (eg: richemont/swatch/rolex for watches, diageo/pernod-ricard for alcohol, LVMH for handbags plus everything). Luxury brands build a moat over time through enforcing pricing, controling the retail experience, and plastering advertisments everywhere. Do it consistiently for 5-10 years and you can become both exclusive and ubiquituous.

They key thing, I think, is never to 'cheapen' the brand by going on sale or diluting it, for example: Gucci holds sales every year, so is less of a luxury brand then LV. Armani is now everywhere, on casual clothing with Armani Exchange and Armani Jeans - unlike in the 90's, no one is going to say 'wow...Armani' anymore. These things increase earnings in the short term but damage the brand long term. If you dont follow all these brands, ask your wife!

You don't have to be interested in luxury goods to understand the industry, like you dont have to smoke to understand the cigarette industry. Luxury markets are dominated by a few big players, with some barriers to entry, and have zero innovation, and (for many people) fufill a basic psychological need. Where better to find buffet-like companies?

I agree totally with BlackCat and that's why having long-term focus is especially important for luxury goods. Luxury goods are priced as such as a result of their perceived exclusivity. Things go wrong when you start having discount, selling cheaper brands for the masses and e.t.c.

While many companies have to resort to cutting price to drive revenue, luxury good is one product where driving the price higher is instead beneficial to the company. Rolex is known to raise its price every year, creating the perception that it is a good investment as well.

I think one of the greatest joy of investing is that you know you will always learn something new each day. The best investment an investor can ever made is his personal education. I try to read widely so as to push my circle of competence wider.
Luxury good is one seems out of reach for me, and luckily for my wife too Tongue

Since there is no direct experience, luxury good retailer is out of scope in my investment for the time being. Big Grin

But the postings serve as interesting read anyway
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
Rolex price control is so KIASU that you find you can't buy a Rolex at the shops of out-going flight terminals of airports round the world where no GST or Sale Tax needs to be paid. Of course you can buy from unauthorised dealers if you dare to take the risk. Not me.TongueBig Grin

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
There is an article on The ST today on luxury product, titled "The Biology of Luxury". It serves as an interesting read.
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
As we evolve beyond Buffet's 1 liners, each of us start to have our own customized appreciation of "circle of competence". Staying within the circle of competence and expanding it are both critical towards our investing journey. It is about been brutally honest to define where your competence is, and intellectually humble/curious to keep expanding it.

Circle Of Competence

As I continued to invest I noticed the importance of quality, both in businesses and in management teams, and have become willing to pay more, up to a point, for high quality companies. Conversely, I noticed that many cheap stocks are really cheap for a reason, or have futures that are far worse than their past financial histories would suggest. This has caused me to broaden my circle of competence and evolve my process over a period of years to the point that I am as comfortable today in assessing intangible qualities of a business as I was in my original, much narrower, circle in my earlier days.


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