Value Investing – Industry Principles and Standards (Lesson 25)
Shifting from economic wide factors that impact market price to industry wide standards is essential with understanding and creating decision models for investment with a pool of similar companies. Industry standards are a part of the spectrum of business principles. This spectrum starts with tenets, universal rules that can not be broken by anyone in business. With value investing, the focus is on the primary business tenet of buying low and selling high. It is an undeniable requirement to increase one’s wealth. The spectrum moves towards core business principles that sometimes are not universally applicable. The final set are industry standards. Each industry has its own unique set of principles it must follow to be successful. Some are a function of law, others are driven by consumer expectations or the culture of the industry. For value investors, understanding this dynamic set of standards for each industry drives the holistic thinking of effective investing.
Value Investing – Industry Standards, A Pyramid of Principles
There is no universal finite set of business principles. In the aggregate, there are over several hundred of them. Many of them are not applicable to every industry; on the contrary, many are specific to a unique business or industry. The best approach to understanding business principles is to look at this in a holistic manner, i.e. overall doctrine down to a few rules specifically designed for that one business.
In effect, think of business principles as an inverted pyramid. The base of the pyramid consists of business tenets,
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