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On Deceptiveness of Investing
Terry Smith says buy quality companies (you could have bought L’Oréal in 1973 at 240X and beaten the Index).
Munger says pay fair value for wonderful businesses.
Howard Marks is quality agnostic.
So which is it? What do you do?
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Munger says pay fair value for wonderful businesses.
Howard Marks is quality agnostic.
So which is it? What do you do?
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Terry’s example: You can buy a company with 20% ROIC at 4X and sell 40 years later at 2X book value and still beat another company with 10% ROIC which you buy at 2X and sell at 4X.
He fleetingly mentions that for simplicity all earnings are retained and reinvested.
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He fleetingly mentions that for simplicity all earnings are retained and reinvested.
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Sounds simple enough.
But this implies that the company with 20% ROIC is actually growing at 20% and one with 10% ROIC is growing at 10%.
Most people don’t get this part. It’s not apparent.
Do you get it?
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But this implies that the company with 20% ROIC is actually growing at 20% and one with 10% ROIC is growing at 10%.
Most people don’t get this part. It’s not apparent.
Do you get it?
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@Sanjay__Bakshi & @contrarianEPS in recent discussions have explained why ROIC alone is not enough. You need growth.
I would add you need high predictability of that growth & ROIC as well to pay up those kind of multiples.
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I would add you need high predictability of that growth & ROIC as well to pay up those kind of multiples.
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In such “they used to trade at 500x 40 years ago examples” people also forget to mention what were the margins/ROICs/product penetration at the beginning of the period.
Was it an already mature business or did it have room to grow?
There is also survivorship bias.
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Was it an already mature business or did it have room to grow?
There is also survivorship bias.
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But Terry is right that you are better off buying high quality businesses everything else being equal. Great companies with good balance sheets and managements find and exploit optionalities that inferior companies can’t.
And sometimes it’s tough to price those.
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And sometimes it’s tough to price those.
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But Xerox/Polaroid/GE/Kodak were all quality businesses. They either filed for or flirted with bankruptcies.
Right to win today doesn’t necessarily mean right to win tomorrow. Especially with increasing technological disruptions.
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Right to win today doesn’t necessarily mean right to win tomorrow. Especially with increasing technological disruptions.
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When Munger says pay fair value, think of him as talking to Buffett or any other protege of Graham. These guys pay single digit PEs. Munger is saying it’s OK to get to double digits at times. Buffett bought even Apple at 12X-13X.
Munger’s “fair” is not same as SM’s “fair”.
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Munger’s “fair” is not same as SM’s “fair”.
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Now there are some businesses with CG issues, bad balance sheet, bad promoters that you shouldn’t buy even at 50% or 20% of current price (again better to stick to quality).
But what if you get a chance to bid for it in a bankruptcy scenario?
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But what if you get a chance to bid for it in a bankruptcy scenario?
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Marks made his bones in the junk bond markets. His perspective is anything can become a bargain at good enough price.
He talks about how Nifty50s from 70s lost 80% of their value. What if you were a retiree who needed to exit? Or someone with unexpected medical expenses?
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He talks about how Nifty50s from 70s lost 80% of their value. What if you were a retiree who needed to exit? Or someone with unexpected medical expenses?
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It doesn’t matter much if those stocks finally caught up 50 years later, does it?
So which of these approaches is right?
The point of the post is not to answer that question. I am not even sure there is a universal answer to this question.
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So which of these approaches is right?
The point of the post is not to answer that question. I am not even sure there is a universal answer to this question.
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There is lot of overlap between what these guys are saying.
1. All of them try to value the asset.
2. Multiples don’t determine value but are derived from it.
3. Valuation has to be a forward looking exercise.
4. None of them say there is a formula or that it’s easy.
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1. All of them try to value the asset.
2. Multiples don’t determine value but are derived from it.
3. Valuation has to be a forward looking exercise.
4. None of them say there is a formula or that it’s easy.
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Most new investors don’t understand the nuances and do not even have the basic toolbox to asses the business/valuations.
When something is so hazy, tough and confusing we try to latch on to any intelligent sounding idea by a popular guru.
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When something is so hazy, tough and confusing we try to latch on to any intelligent sounding idea by a popular guru.
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Imagine Wiles explaining his proof of Fermat’s last theorem. How much of it would we understand?
But most of us assume we understand what the great investors are saying. It’s seems so accessible.
It’s not.
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But most of us assume we understand what the great investors are saying. It’s seems so accessible.
It’s not.
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Investing seems deceptively simple & is terribly hard.
Almost all of us are overestimating our ability as an investor.
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Almost all of us are overestimating our ability as an investor.
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People who survive and do well are ones who are aware of their ignorance. This includes these masters.
They wait for the easy decisions and know market inevitably gives you those.
Eventually.
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They wait for the easy decisions and know market inevitably gives you those.
Eventually.
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In India you got a chance to buy in 2008, 2013, 2016, 2018, 2020.
1. Don’t do anything stupid.
2. Wait patiently.
3. Buy good companies cheap (which they do get in a crisis).
4. If the decision is not easy, wait.
5. Debt returns are fine at times.
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1. Don’t do anything stupid.
2. Wait patiently.
3. Buy good companies cheap (which they do get in a crisis).
4. If the decision is not easy, wait.
5. Debt returns are fine at times.
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Confusion is the stable state for a good investor. Clarity is a rare. Certainty is absurd.
Read. Read. Read.
(End).
Read. Read. Read.
(End).
