According to 3G Capital Management, successful investing starts with the three Gs: good business, good management, and good price.
On February 1, Pavel Begun, Managing Partner at 3G, a global investment firm, spoke with Professor George Athanassakos' value investing class and explained how the organization finds and characterizes businesses worth investing in.
As their name states, they look for the three Gs:
- Good Business
“We define good business as one that is competitively entrenched, generates high return of invested capital and is in solid financial shape.” Specifically, 3G looks at businesses that are industry leaders and show industry longevity in order to predict their future value. They also look to businesses that generate with ROEs, or return on equity, of 15 per cent and above. Finally, they look at the debt payback period of business to ensure it is no greater than three to five years, helping to determine their financial shape. - Good Management
3G seeks management teams that are good at both operating a business and allocating capital. “We’re looking to see if management has done a good job improving the business’ competitive position over the years, […] and if they made sure to invest in the future.” - Good Price
3G defines good price by looking at a business’ revenues in an economy that is “not too hot and not too cold” to reflect a normalized economic environment and help understand a business’ true earnings.
When it comes to investing, it’s important to do your research. Although it may sound simple, some investors fail to do their due diligence.
“No one in this business is ever going to tell you they’re looking for the 3Bs: bad business, bad management, and bad price, but a lot of people end up doing just that.”
