The Peasant's Investment Principles

Filtering down into the detail; From Motive to Framework.

Dear fellow readers, consider this to be part 2 of 5 of my tell all on “lessons I’ve learnt - systems I’ve built” when breaking down my approach to investing in the stock market, which may perhaps contain some useful information for the brave individuals venturing into individual stock selection.

A gentle reminder: you can also keep up with me on X at ASXPEASANT, for little snap, crackle and pops on all things economy and stock, and off the cuff commentary for my general view on things.

The Contents:

Continuing on with the segments I set out in my first post, this content will be broken up into 5 parts to make it easy to navigate, starting from general philosophies to measurable, technical details:

1. Investing Rationale

2. The Investment Principles (This Post)

3. Filtering for Opportunities

4. Putting Companies to the Test

5. Final Selection and Portfolio Weighting

My investment principles are the in essence, the fundamental rules and patterns I apply and look out for when choosing a market segment and assessing a particular stock. I try to make these as objective and measurable as possible. I could apply the broader principles into selecting stocks and ETFs (which would then provide me with an average exposure to a theme) and I know tends to be the safer choice for many. However, I take great pleasure (but also expose myself to significant risk) in attempting to not only locking down an outperforming segment but to pick the best performer within that group.

So, what are the principles and how do I apply them?

My key principles in company selection can be broken down into 5 categories. I find that if I can easily identify each of these characteristics in a stock, then I feel a higher sense of conviction that I will do well within my expected timeframe and risk / reward objectives.

The categories are:

• “Strong” Management

• “Wide” Moat

• “Large” Revenue Potential

• “Healthy” Gross AND Net Margins

• “Immediate” Share Price Value Proposition

Without further to do, let’s get into the very specific details in how I measuring each of these objectively and conscious of bias.

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Note, the detailed discussion around the way I go about building a position, determine my risk versus reward, and timeframes for the expected result will be covered off in Part 4 - Putting Companies to the test and Part 5 - Final Selection and Portfolio Weighting. In these segments I will discuss the way that I balance my positions within all the promising options on the ASX based on deliverable timeframes, cash runway and obstacles.

However, in this segment I am going to discuss what each of the principles mean, why they matter, and how to objectively identify these characteristics when looking at any particular stock.

Once a stock passes these tests, they then make it into a watchlist where I then apply more tests for entry (for instance if I am waiting for a better valuation to enter)

“Strong” Management

As you have heard time and time again from some of the greatest investors of our time, management is the key to any successful business. But what does this mean and how is this applied in real life?

Let’s take a look at a famous precedent founded on this very principle by Mr Buffet himself. Winding back the clock to 1983, Buffet invested $60 million to acquire 90% of Nebraska Furniture Mart from the founder Mrs. B Blumkin. The story goes that Mrs Blumpkin started this company at the age of 43 (in 1937) with a little over $500, and persevered as the founder of the business to grow the company into one of the largest home furnishing stores in the country prior to landing the deal with Mr Buffet, who claims the acquisition was based not on traditional Buffet style valuation, but on the confidence in Mrs Blumkin’s leadership and administrative prowess.

Many of my key investment principles are derived from studying the lesser-known successes such as Mrs Blumkin, as herein you discover the common traits which become easy to spot in any management team.

So, in no particular order;

Integrity

Mrs Blumkin’s mentality was consistent from the onset, and it was a mentality founded on integrity. She believed in providing end value to her customers, and her unwavering commitment to this cause - undisturbed by greed or success - allowed her business to continue to leapfrog the competition.

So ask yourself when looking at a company,

Does the founder show signs of selling out, “cashing in” after a successful run in the share price, for instance, when the underlying business free cashflow is not commensurate to the payment? Let’s put this another way and frame this towards the many medium and large cap companies on the ASX which are speculative or pre-cashflow. Is your management drawing down on investors cash (lets be frank for a minute - a company with no free cash flow is running off YOUR money, i.e. other people’s commitment to the business) to finance their lavish lifestyles? Have they recently stepped in as CEO, after a change in management, and awarding themselves a large pay to continue to push the business forward?

Without mentioning any specific names, there are hundreds of examples of this on the ASX, I strongly believe that this is one of the easiest characteristics to identify from the get-go. I too get distracted from the rosy colored presentations of ASX specs, and gloss past the directors renumeration where low share price and performance hurdles are placed for hundreds of thousands, or occasionally millions of dollars in performance option issuances. We need to objectively assess renumeration in proportion to the business cashflow, and frankly, if cashflow is not achieved within the expected timeframes, and a capital raise is undertaken with management salaries still in the hundreds of thousands, we need to question the integrity of management.

Integrity is also reflected in their communications, and their reflections on the business. Are they patting themselves on the back for getting halfway? For making good progress but not fulfilling the years objectives? Are they framing the reports in such a way to justify additional capital outlay whilst they splurge on cash and continue to poorly administer their operation. This leads me onto the next quality I look out for:

Honest in Communications

Does management clearly state their goals? What does this even mean?

What I look for here is clear explanation on a company’s timeframes and expected cashflow output. Notice how in my world, performance metrics for any business are very black and white - how much cash, and by when? All management know this, because ultimately profit is essential for any business operation. But good management make this explicit to us, the investor (or future investor). Good management will set near term goals, with known timeframes, as well as clearly define the impact their endeavors will make towards cashflow.

To give you a figurative example using biomedical stocks. You can immediately tell when management know what their hurdles are, how long they will take to complete, and what their target market is, and expected market penetration through commercialization will be.

If the company I am looking at is wishy-washy about the target market, and stating broad brush target market figures, but not really defining their competition or expected penetration, I know they’re loose and most likely being opportunistic to retain investors interest or outright dishonest.

These people are professionals, and I would not give them the benefit of the doubt by saying “they didn’t know”. These CEOs are dedicated to are running the company you are looking into day in-day out and surrounded by participants in the industry. They know their competition, the regulatory framework, the hurdles and the likelihood of their success. If that is not being clearly communicated to you as the shareholder, this should prompt you even more to seek out this information yourself (I would always verify this information in any case, even if management are being up front with it).

Since I have written about this previously, I will refer back to how Dimerix ASX:DXB management had very clearly stated their objectives in 2019 with respect to the commercialization of their drug, and at least once a year since then, had referred back to their objectives and reported their achievements against these goals. I specifically provided an example where in 2024, Dr Nina Webster measured the company’s current position against her goals.

Humility

An underrated characteristic. Why does this matter? Elon Musk isn’t humble?

Well, I would argue, in the uprising of Mr Musks’ companies (scandals aside) he absolutely humbled himself, sleeping on the factory floor during the first Tesla assemblies, to ensure investors’ money, as well as his own (alignment! coming up next) converted into real results.

He could have been like many others, left it up to his key operational staff to try and bring production up, and upon that failure tapped the market for a significant capital raise at a substantial discount to the current share price. I would know, I have lost money WAY too many times that way, almost enough to question whether management operate any other way. That is why humility is absolutely a fundamental characteristic I look for in management.

It is the way they act, but also the way they speak. When management are onto something fantastic, and in companies where I’ve done the absolute best, management tend to understate the grandeur of their achievements. They tend to focus matters of fact, on the impact their product will have to people’s lives, the consumer. They focus on the work ahead of them to achieve that goal. They talk passionately about the near-term objectives of the company, and how these will translate to long term reward.

You can tell humility from actions too. For example, the chairman of company I had recently looked into, Fenix Mining (ASX:FEX), spoke a great deal about the business honoring policy with respect to pay out a portion of free cash as dividends and how undervalued they were in terms of capitalization. However, in my opinion, the company’s recent actions led to costs being disproportionately large, a halt on dividends and a pivot in direction with respect to cash management.

I would argue in this instance, sharp, HUMBLE investors would have appreciated the company’s cash requirements for expansion and would have priced this into the share price (hence the low valuation). Going back to my point, I don’t give management the benefit of the doubt in terms of situational awareness, this is what I would call a lack of humility, amongst other things, including factors outside of the company’s control to do with commodity price.

In my opinion, a little more humility, with management agreeing to pull back on lining their pockets with cash for several years with tens of millions in cash payouts, from a sub $200M market cap company, could have significantly accelerated the long-term trajectory of this business. With any commodity play, sure, the rising tide of commodity price lifts all boats. Will this boat be lifted as much as it should? Based on my assessment with respect to humility, there may be a leak in this ship as cash continues to line pockets instead of being invested back into the business.

And thus, leads me to the quality which can be summarized in one question, is this how the founder would behave?

Founder Led Mentality

Having a founder still in place in any company, is already an enormous asset. A founder has more than just cashflow on their agenda, they have purpose. I’ve learnt that money is not really the motivating factor for any great achievement. When you look deeper, you will find that the origins of anything great derived from a great sense of purpose.

• A side piece on Purpose: We tend to forget we are not machines designed to go to work and print out gross product and global output (much unlike how our governments see us). We are humans, with desires, with visions and passion for more. Even the most defeated of us, when pressed, deep down we want to know we are doing something meaningful.

  Some of us not only are aware of that desire, but have harnessed it, and have the drive to assemble the parts to act on it. Fewer still have the determination to persevere through obstacles, the grand vision and the long-term mindset to see it through to the end. This is what you are looking for when you assess the management of your chosen company.

So how aligned is management with the founding objective of the organization. As a shareholder and investor, you automatically align with the long-term success of your organization - you know that if the company management is disciplined and focused, that the dream can be realized, and you will be rewarded.

You won’t be rewarded as a shareholder for short term goals being hit without consideration to the long-term impacts (such as a poor M&A to boost EBITDA without consideration of cost inefficiencies and lack of inorganic growth through business culture and drive) which come along with managers receiving dilutive performance bonuses which detract from your share of the company!

Look out for how management prioritize outcomes. As per previous examples, is the company paying out dividends instead of using its capital to advance the company’s purpose? Easy example, think about the size of Apple and Microsoft before they started paying dividends.

How about Fortescue Metals? In contrast to the example I provided earlier (Fenix), Fortescue market capitalization was 20 billion before it announced its dividend policy.

How about buy backs? It does depend, but generally when I see a company undertaking buy backs, this indicates to me strong alignment between company and shareholder. A buy back removes shares on issue from market, which give more ownership back to the remaining pool of owners. In this sense, all owners are fairly rewarded. The reason why this depends, is of course if the company is intended to be high growth, whereby I would prefer to see the cash be deployed to drive organic business expansion in a sustainable way.

Now, if this has not already wiped out 95% of the listed companies. This next one will bring the figure up to 99%.

“Wide” Moat

As the name suggests, a company’s moat is its ability to defend its market against competition.

But commodities are not a unique product, does that mean miners have no moat?

No, absolutely not. In fact, mining companies could be considered to have some of the largest moats apart from technology and biotechnology. This is typically founded around the resource. There is a strong argument that most tier 01 geological assets for commonly mined commodities (gold, iron, copper, oil) are known, and either being mined right now, or mines are being planned around them. In this instance, I would consider the moat to be a resource which affords a low cash cost of production due to the quality of the mineral, or a patented process or methodology which permits a lower cost extraction.

As we venture into the brave new world of the future, we should also cast our eyes towards the “electrification theme”. Regardless of which side of fence you sit on, it seems as though electric vehicles and green energy is here to stay to some capacity, and I would argue that this resource sector is still in its infancy.

Are there ways to extract lithium in a clean and efficient manner (what is DLE and how far has this progressed, who are they key players? Can Anson ASX:ASN get their required regulatory approvals and funding to get out of the ground, and how real is their DLE technology?). Who is leading the race outside of China with respect to rare earths? How does their extraction technology compare? Who is the greenest steel producer considering this is one of the largest contributors to “green house gas” emissions sitting somewhere between 7%-9%. Who is leading the race with the electric arc furnace?

These are the kinds of questions I ask myself as I narrow down the question - who has the MOAT in the industry or sector I am targeting. I’ve specifically used mining as an example as this would appear to be the least obvious place to search for a moat.

Being the contrarian that I am, I’d like to prove the point that a moat can exist in any industry where a company can shield its market from its competitors.

Other indications of a strong moat include:

• Intellectual Property / Intangible Assets: The extent research and development to bring a product to market, and the protection around the intellectual property. Similarly, Rights to an asset, or significant regulatory approvals.

• Brand: The branding and stigma around a product particularly when it comes to luxury or reliability.
  Want a reliable car? Toyota. Did I read the specs on durability, or watch the crash tests on YouTube? No. We just “know “this is the case.
  I want to buy my wife her first luxury handbag? LOUIS VUITTON, probably.

• Network: Users tend to stick to a network when there are others already using it. The network becomes more valuable as more users contribute. This is a self-reinforcing moat which is very difficult to disrupt without structural / regulatory change (see: USA tries to ban Tiktok)

• Economies of Scale and Cost Advantage: A company who can keep competitors at bay by offering lower costs to block competition from entering. My worst form of moat - and if you’re banking on this as your company moat, beware of innovation as the ultimate weapon against this barrier.

• Exclusive Contracts: A company that has secured long term exclusive contracts act to obstruct competition from servicing the same market. Pay attention to the terms of the agreement if you have visibility.

There are several other categories, but if your chosen company can demonstrate a moat in these objective categories (I would say brand or network being the most subjective) then I would tend to give it a tick on the wide moat.

So, that has wiped out 99% of the companies, what is left?

Ok - jokes aside, the good news is that by satisfying these two categories “Good Management” and “Wide Moat”, you’re most likely going to be pretty happy with the way the company checks out on the next 3 criteria.

Large Revenue Potential

Herein flows the good news. It would be a rare circumstance that your company has a fantastic moat, and brilliant management, but can’t demonstrate revenue potential.

What we are looking for here is transparency, and an honest well educated take on the market size, and the current competitive landscape.

To give you an example;

XRF Scientific (ASX: XRF) have what I consider to be great management, however with some flaws. Namely, they have a dividend policy despite not having reached anywhere near their full potential, and they what I consider to be a modest growth strategy, despite having an enormous market ahead of them albeit largely serviced by others. Let me paint the picture:

Thermo Fisher Scientific (MCAP 200B), Malvern Panalytical (MCAP 5B), Bruker Corp (MCAP 12B), Olympus Corp (MCAP 20B), Hitachi High-Tech (MCAP 65B), AMETEK who own Spectro (MCAP 35B) and others, and then you have XRF at MCAP $200M.

To then analyze the potential market of XRF, you would compare their products to the range offered by the competitors. Reach out to people in the industry who use the equipment day to day. I would then understand the sales revenue generated globally by the sale of these products, and assess whether management have aspirations to go global, and whether those are single line statements or detailed strategic plans. This should give you an idea of potential revenue scale.

Normally however, I like to target the low hanging fruit when it comes to a moat, and this to me has to be technology. I automatically tend to skew towards biotechnology in particular, due to its prominence on the ASX, and the fact that for some reason (to do with our local expertise and network) we are able to deliver on that front more so than other technological fronts such as high technology manufacturing.

Not all technology is created equal

Even if you are investing in technology (lets assume it’s viable and achievable), for me to confirm whether this will translate to blue sky revenue potential I ask myself whether this is addressing a significant unmet need.

With biomed, is this just another player with a unique approach on a condition which already has viable treatment or therapeutic options? Or is the condition largely untreated?

Are there competitors with products tackling the same issue from a different angle which would erode the company’s market share, which circumvents the company IP? For example, how many tissue repair companies with a unique approach to repairing skin from burns are there in the market? I would say at least four or five. They all have intellectual property protecting their particular product, but this does not shield them from competition, as all other competitors can also address the same issue with their own IP.

On the other hand, how many companies operate in the field of radiopharmaceuticals developing targeted therapy for prostate cancer market (enormous market size) demonstrating a complete response like Clarity Pharmaceuticals (ASX:CU6). I would say, not that many, probably less than 5 globally. You can see how the potential ramifications of this unique discovery and significant revenue potential are being reflected in the stock revaluation.

Healthy Gross AND Net Margins

More good news here. If your product has passed the moat test, your management is aligned with shareholders by doing the right thing to control costs, you’re already looking at a favorable competitive landscape, and therefore healthy margins.

I like to set my gross margin expectations to at least 65-70%. What I normally exclude from this metric (if the business has not done so already, which they should do in their formal reporting as a minimum) is administrative and other fixed costs such as interest expenses. For a company to exceed 80% gross margins, I would say we’re most likely looking at a software company, or a royalty-based business whereby cost to produce revenue is minimal.

I then like to set net margins expectations in excess of 25%, once they have started to mature in their market. For a spec entering commercialization, I would say within 3 years. If this isn’t the case, then really drill into your investment. Are admin costs blowing out because product uptake was not what they expected and they’re having to significantly expand their sales force? Are they taking the wrong approach with third party distributors who are over charging and underperforming? Did you form the wrong opinion on management and are they finding other ways to line their own pockets along the way (I circle back to my assessment of management).

What if the company fails on gross margins, but succeeds on net margins? I’m willing to relax that gross margin to say 60-62%. Any lower than that and you’ll find your business operating cash flows suddenly become more sensitive to external factors, such as oil price for instance, which can quickly and suddenly impact your costs of production in an unexpected manner and cause fluctuations in gross margin year on year.

Last but not least, the discussion to kick off entry:

Immediate Value Proposition

For a stock to pass my final sniff test, the current valuation needs to be commensurate to the risks the company faces in expanding or achieving cashflows, the timeframe to achieve those cashflows, and the scale and reliability of those cashflows.

This does not mean the stock has to be trending down and thus “discounted” or in an accumulation pattern and thus time to enter based on technical pattern analysis.

I look at the current business momentum, relative to its enterprise value, (covered below) and try to understand whether there are enough near-term catalysts on the horizon which would warrant investing.

The catalysts I look for are typically cashflow centric. I set out from my own research, a timeline of events from today, till the company achieves first or additional cashflow.

A few things I’ve learnt to rely on through my own hard-earned lessons:

• The market can only price in what is known.

• The market is not good at measuring risk.

The market might know there’s a risk such as a regulatory approval on the horizon, but on aggregate, has most likely wrongly estimate the probability of success of that known risk. Especially with speculative stocks, it can be over or understated by multiples!

Less so for well established companies, which will spell out the capital investment, investment timeframe, and the ROI. Investors can also form an educated understanding of a company’s ROE, and place future valuation on expected future equity.

This is certainly not where I find my edge in identifying an immediate value proposition. In fact, this is probably where I find the least value, as most likely big funds have deployed their future cash flow models and priced in returns at 10% per annum (rule of thumb I apply, is I assume sophisticated funds generally discount future cashflow to 10% per annum).

What I look for is a company which is due to realize significant value within about a year and a half.

Very specific! Why a year and a half, you ask?

My simple view of the world is that funds are measured against their performance each financial year. It would only be logical that funds in general, would want to put capital to work at the right time, and therefore would only do so if there are enough value catalysts in the pipeline for the next year, otherwise they face the ever present cost of capital, or opportunity cost, which is the cost of their capital not being deployed at a rate which they could achieve on aggregate across their performing portfolio. I also like to call that figure 10%.

So as a result, I tend to position myself in stocks at least 6 months before that year.

When I get it right, I do notice that my stock picks tend to suffer some downside in the short term, as initial capital sits idle, before hitting catalysts, and new value, and typically additional funds flowing in to assign a value to the derisked company profile.

When I get it wrong (which I often do) the company misses on a target objective, and this is where more research is required in appreciating the product and the likelihood of success particularly in tech. I have posted and will continue to post my ideas on individual stocks to give you an idea of how I try and tackle this.

Now, to cover Momentum and Enterprize Value.

As above, I look at the current business momentum relative to it’s enterprise value. This means, I look at the following:

• Cash burn rate: How much cash does the company have, and how much does it need to hit a significant milestone? Let’s use a biotech. Does this biotech have enough cash to complete its phase 3 trials?

• Future Cash pipeline: Has management been proactive in lining up sources of future cashflow, whether it be commercialization or licensing? I would want to see that the company is not relying on future dilutive events to keep moving forward. Again, using biotech as an example, they should be actively perusing agreements with milestone payments upon achieving objectives, which would be sufficient to take the company to commercialization.

• Timeline: How much time is required to hit key catalysts. The important note here is to be very selective with how you select your catalysts. I evaluate a catalyst on whether it has the ability to de-risk the stock in achieving its future objectives. These include: regulatory approvals or licenses, securing financing, securing an asset (either IP, or defining a mineral resource), commercial agreements (particularly binding), and of course positive overall results (i.e. achieving the objective end point, achieving the signed commercial deal).

  I seek to understand when these catalysts are expected to arrive, and I measure this with respect to my entry, as I explained above.

• Enterprise Value: To fill in the last missing piece here in my selection criteria, I try to understand the company’s future Enterprise Value when evaluating the valuation (market cap) the market is assigning to the business today, excluding cash and adding debt.

  (EV = Market Cap + Total Debt - Total Cash)

  This is how I work out whether the promise of future cash flows will result in a re-valuation of the overall share price (before deducting any debt required to achieve these objectives to that valuation).

  I’ll give you an example to make this less abstract - I am hypothetically planning to invest in a company which has this cash flow profile:

  FREECASHFLOW 2024: $0 (CASH SPEND $50M)

  FREE CASHFLOW 2025: $0 (CASH SPEND $50M)

  FREE CASHFLOW 2026: $100M (INCREASING EVERY YEAR ON)

  I would consider a fair valuation for this stock today to be a market cap between $400M and $500M, depending on the increase in free cash flow every year, and depending on the risk ahead. If there is a significant jurisdiction risk (a mine in Africa for example, these can often be discounted significantly from this position, I have seen upward 80% discount, and for good reasons).

  How did I come about with $400-$500M?

  By 2026, the company may express a net profit position of $30-$50M (figuratively, based on expected re-investment of the free cashflow via capital expenditure and expansion).

  The valuation I would apply to $50M net profit figure varies based on segment and the reliability of that income in the future, but if the net profit is generally considered stable and appreciating, I would calculate a 7% yield on this number and deduct the cash spent from the figure, and then discount 10% off that valuation for each year in the future to bring it to this year’s price.

  $50M NPAT: EV: $714M (50M / 7%) - CASH SPENT ($100M) = $614 (2026 MCAP)

  2025 MCAP: $550M

  2024 MCAP: $500M

  The market weighs risk differently every day, so an acceptable range would be $400-$500M for me. I would consider an entry around $300M to be a good opportunity (if I thought the risks were being overstated).

  If that net profit figure was considered NOT to increase every year (such as how COAL mining companies were being treated 2020 - where companies were valued at 2x NET CASH at the extreme) your valuations will fluctuate. The same concept applies for many commodities which have “hot” and “cold” sentiment based on global cyclical demand.

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With that, I will wrap up this segment on my investment principles and I greatly look forward to progressing my next post which will discuss my process of filtering through information to find, what I consider to be fantastic opportunities within a competitive stock market landscape!

Thank you for your loyalty and your interest, and I look forward to seeing you back here soon!

Sincerely,

Peasant

Please note: I am a social media “entertainer”. My value is derived from my artificial persona - PEASANT. I am not a financial advisor and have no formal financial qualifications.

All of the information and insight provided is self-reflection, for entertainment purposes only and should not be considered financial advice. All investment decisions should be made in consultation with a professional financial advisor, based on your own personal needs, circumstances, and research. Please consult with a licensed financial advisor before making any financial decisions, as the content shared here is not intended to guide your investments or replace professional advice.