Munger: How to analyze an industry in a relatively short time
Shareholder: How do you analyze an industry in a relatively short time and determine whether it is worth investing in?
Munger: First of all, you can look at a company's historical records and infer its future from its history. However, it's definitely not that simple. If it were that simple, everyone would be investing.
Fundamentally, it is essential to understand a company's business, to be clear about what threats a company faces, what opportunities it has, and its competitive position. Looking only at past performance growth, past capital returns, and past sales makes it difficult to accurately predict a company's future. Only with a deep understanding of the business can one more accurately predict the company's prospects. When investing, one really needs to understand the business.
Some businesses are relatively easy to understand. I serve as a director at Costco. Costco is a company that is very easy to comprehend. Anyone who is educated and has a certain cultural foundation can understand the business of chain supermarkets, can grasp the development history, operating methods, and possible difficulties faced by supermarkets. If I were teaching at a business school, I would start with the retail industry, because it is easy to understand. Once students have a solid grasp of retail, I would then guide them to more challenging areas, such as the home appliance manufacturing industry.
Many companies can be summarized into models according to your understanding. The model of the Wrigley company is understandable to everyone, right? Wrigley’s business is easy to understand. When researching an industry, there is no fixed order. Personally, I think starting with the retail industry and gradually delving deeper is the most appropriate. The specific order is not fixed and varies from person to person. Studying each company and analyzing their business, I find this process very interesting.
Taking the automotive sales industry as an example. We have all bought cars. People like Warren and me, when we walk into a car dealership, some questions naturally arise in our minds, such as, is this business good? If it is good, why? If it is not good, why? For us, analyzing a company’s business has become a habit. This is a fun process and one that improves with practice.
Additionally, when dealing with some car dealers, you will find that they are making money, but their way of making money is through deception. Some dealers also make money, but without deception. Having read the book by Cialdini, you will understand those deceptive tricks even better than the car dealers themselves.
