How to Identify a Good Business, Find a Great Company, and Discover a Favorable Price
The criteria for judging a good business revolve around understanding two key questions:
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What are the current barriers (moat) in the industry?
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What is the future outlook (growth potential) of the industry?
Understanding these two questions is not overly difficult—it primarily involves a comprehensive analysis of an industry's value and growth. For example, the pharmaceutical industry is a classic example of a good business because top pharmaceutical companies can continuously develop new drugs and secure patents, which serve as their moat, while the vast market represents future growth potential.
Future good businesses will still be concentrated in three major sectors: pharmaceuticals, consumer goods, and TMT (Technology, Media, and Telecommunications). Why? Whether you're rich or poor, facing an economic crisis or war, humans will always experience birth, aging, sickness, and death, and will always need to eat, drink, and live. Thus, only pharmaceuticals and consumer goods can become century-old enterprises and long-term bullish stocks. While pharmaceuticals and consumer goods help humans survive, technology helps them live better. However, unlike the investment philosophy for pharmaceuticals and consumer goods, the tech industry thrives on innovation or faces extinction. Tech giants from 20 years ago can still go bankrupt today, and companies like Google, Apple, and Tencent will also be淘汰 if they fail to innovate. Therefore, the core element of investing in tech stocks is to ride the wave of the times and stay in the present.
After identifying the broad industry, it’s necessary to drill down further. The pharmaceutical, consumer goods, and TMT sectors can be subdivided into areas like dentistry, ophthalmology, in-vitro diagnostics (a huge market in China), fast-moving consumer goods with unique attributes, and even more细分 industries within TMT. Of course, good businesses are not limited to pharmaceuticals, consumer goods, or TMT. Any细分 industry can be defined as a good business as long as it has its own moat and promising growth prospects.
In summary, a good business boils down to judging future macro-level industry changes (including changes in macro policies). If we can foresee the inevitable outcomes of these changes, then we need not worry about the twists and turns of the development process or fear any short-term fluctuations.
