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1/x Short thread on compounders and selling winners. I was inspired by Howard Marks latest memo released earlier today. Hopefully provokes some thought into current >20x sales valuation environment. Oh and if you are a die hard $TSLA bull, you may or may not want to read further.
2/x Howard quotes his son in the memo who says: ”...if you have a compounding machine with the potential to do so for decades, you basically shouldn’t think about selling it (unless, of course, your thesis becomes less probable).”
3/x I barely hold any of the big tech stocks but if I did, I would like to own one which I am convinced can compound cash flows at an above cost of capital rate. I have no idea if I am too late to the party, have not done the work, but $AMZ or $FB comes to mind.
4/x What this text also made me realise is the, what I think, common misconception among young investors today that compounding stock returns are a result of “compounding machine”esque businesses by definition.
5/x $TSLA has proven to many owners what the compounding of returns actually can do to your wealth and people have become infatuated with the results.
6/x However, with its current business model, it is probably wrong to assume that Tesla is compounding cash flows to an attractive return. I think we all agree that the new scale which comes with the Berlin factory did come at a high capital cost.
7/x $TSLA does not grow profits quickly without new capital. Period. It may do in the future though, but the car industry is not knows for stellar cash flows. They will need to venture elsewhere and maybe they do, I have no doubt in Musk realising his vision. But to what cost?
8/x To my understanding of Howard’s latest memo and Andrew’s point, a company like $TSLA does not fit under the “never sell proposition” unless you are confident that anything they are doing today is compounding. I am not confident in this myself, could be wrong though.
9/x My conclusion is that if you are invested in a company that has seen its stock multi-bag in the past bull-run frenzy driven by tech, you should be comfortable with understanding why the business model is a “compounding machine”, otherwise you should consider selling.
Would love to hear your take on potential compounding machine business models and the memo overall!
Here’s a link to the latest memo: https://www.oaktreecapital.com/docs/default-source/memos/something-of-value.pdf
