Tuesday, April 28, 2015

The Value Canvas: Conviction grading

Eric Ries has written a wonderful book on Lean thinking for start-ups. The book describes a method to analyse your start up on a single page – albeit a large A3 or an A2 or a whiteboard page. I put that together with the framework Donald Francis came up with and now use something called a value canvas with consists of:
  • Conviction canvas
  • Pricing canvas

The Conviction Canvas

The conviction canvas has 5 columns for each of the conviction level factors:
1.    Business Quality
2.    Management Quality
3.    Fundamentals
4.    Industry, position within industry & track record
5.    Growth prospects

Under each factor there are further sub-factors aimed at forcing you to think about each of these factors separately. Once that is done you grade each sub-factor with a score which in turn. The average of those sub-factors forms the score for the factor. Each factor has a weight-age which is used to calculate a conviction score.
Now this is not a magic wand that will give you the exact correct answer every time. The intelligent investor could use the value canvas to:

  • Break down the company into small sub-factors
  • Once broken down the idea is for you to remove all biases and judge just that factor – filtering out all the noise
  • Compare one with another
I could come up with detailed rules on how to grade each section but that would make the canvas too complicated to be useful. It already is a bit unwieldy. An absolute score has no meaning without a set of rules to grade and so I only use this tool as a comparison between a few investment choices. It is a super tool to compare two companies in the same industry and it performs decently well comparing two disparate businesses as well.

This article is related to the following articles:
1. http://www.igvalue.com/2015/02/judging-quality-of-management.html
2. http://www.igvalue.com/2015/03/the-science-behind-capital-allocation.html
3. http://www.igvalue.com/2015/03/getting-conviction-management-quality.html
4. http://www.igvalue.com/2015/04/getting-conviction-fundamental-factors.html
5. http://www.igvalue.com/2015/04/getting-conviction-fundamental-factors-2.html
6. http://www.igvalue.com/2015/04/getting-conviction-fundamental-factors-3.html