Geoff Gannon from Focused Compounding has highlighted these to be his defense-in-depth approach when it comes to evaluating a potential investment:
- Price: 2/3 or less than the average company in that industry
- Industry: better than most industries
- Management: better than most management teams
- Position in the industry: better company and above average in this industry
Some industries included in the discussion were:
- Advertising Agencies
- Banks
The best companies Geoff had found were what he called poorly-run business in an above-average industry. Typically these companies may be in the mid-single digit position within the industry. They seem to exhibit the ability to continue operations even though results from operations may have waned in recent years but despite that the company still earns at least the cost of capital. (Taking it further, there are business out there that might have survived a near-death experience.)
Additionally, using defense-in-depth as it relates to the balance sheet and the income statement was an important factor to gauging the price to pay for an investment. Judging the business by price-to-assets and also price-to-earnings and looking at both to ensure that margin of safety.