Investor Mindset Question

Hi Folks -

I wanted to see how people typically approach these questions:

1) Would you rather own a bad company in a good industry or a good company in a bad industry?
2) Would rather own a good company in a great industry or a great company in a good industry?

Thank you!

 
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Most Helpful

1) I'm assuming you mean bad company in good industry vs good company in bad industry. I think I would lean towards bad company in good industry on principle because it's relatively easier to improve a company tactically (improve operations) than to improve a company strategically (pivot industries). However, I would caveat to this, it also depends on the market structures of each of these industries. If it turns out that the bad company operates in a high barriers to entry "good" industry that's already very consolidated (monopoly/oligopoly) and they are not a part of the "winners" I could potentially prefer a good company in a bad industry with the thinking being that both the loser in a consolidated good industry and operators in a bad industry are doomed to zero economic profits in the long-term, so maybe I'd prefer the one that's better operated.

2) Good company great industry for a similar reason to the above, additionally, the "good" company could be relatively cheaper than the "great" company with more room for growth.

 

1) Bad company in a good industry. Listen to what Buffett says - When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

2) Depends on many factors, I would start probing the interviewer with questions like are they thinking about any one specific industry or business model. Good company in a great industry = you can have multiple players who win and capture share. Industry growth can carry the industry participants even if product's aren't differentiated / have a competitive advantage. Great company in a good industry = over the long-term can still outperform (i.e. think cyclicals)

But defining a GREAT industry really comes down to 1) rate of change in the industry, 2) supply / demand dynamics which in turns drives pricing trends and growth, 3) barriers to entry, and 4) nature of relationships between the customer and business

 

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