This Week I Learned #99
“Go to bed smarter than when you woke up”
2020-04-20
ROIC Patterns and Shareholder Returns Sorting Fundamentals and Expectations Paper by Michael Mauboussin:
"The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed and not the achievement of consistent gains in earnings per share. In our view, many businesses would be better understood by their shareholder owners, as well as the general public, if managements and financial analysts modified the primary emphasis they place upon earnings per share, and upon yearly changes in that figure.” - Warren Buffett
"Earnings growth only creates shareholder value if a company generates returns in excess of the cost of capital"
“..sustaining high margins is more value-creating than rapid invested capital turnover” -> so differentiated products do better than cheap cost products that Nick Sleep talks about.. wonder if it only worked then because it was novel and new
“We selected the companies that fell in the top quintiles over the full decade based on these measures, and analyzed their TSRs (total shareholder return)"
High-margin group enjoyed an 11.6 percent TSR, about 300 basis points higher than the index average, while the high-turnover group failed to match the index, earning a 7.7 percent TSR
Differentiation is often associated with high operating income margins, while low-cost production is linked to high invested capital turnover
2020-04-21
Economic Returns, Reversion to the Mean, and Total Shareholder Returns. Anticipating Change Is Hard but Profitable. Paper by Michael Mauboussin and Dan Callahan:
Different dataset from Mauboussin’s other report with this one going from 2003-2012 and looking at CFROI over ROIC.
“...market rewards improvement of CFROI and punishes deterioration of CFROI. For example, the portfolios of companies that began in the two lowest quintiles of CFROI (Q4 and Q5) and ended in the two highest quintiles of CFROI (Q1 and Q2) enjoyed an average TSR of 26.2 percent"
“Companies that flouted reversion to the mean by remaining in Q1 for each year of the decade delivered a TSR of 20.6 percent with a standard deviation of 21.8 percent.” = Persistent high CFROI is valuable
“Investors should focus on the relationship between earnings growth and returns on capital. EPS by itself reveals very little about the true value a company creates because it does not account for capital intensity or the cost of capital. Investors should consider returns on capital first and earnings growth second because earnings growth can be neutral, good, or bad based on the economic returns"
https://d2wsh2n0xua73e.cloudfront.net/wp-content/uploads/2013/12/document-1026377441.pdf
2020-04-22
Chuck Akre’s interview on his investing journey. Always timeless to learn about Akre.
2020-04-23
Fascinating interview with Twitter’s Modest Proposal on Invest Like the Best podcast.
Introduced me to the value of Bill Nygren’s letters. I knew he was an old school value guy but hearing his transformation has been fascinating. The adaptive investor. Will go through his letters to gain an understanding for the future.
I like the view of homogeneous small/mid-cap tech companies like Grubhub/Match Group who can dominate their niche and how the market assumes they won’t be able to dominate because of FAANG. But those who have everything to lose by not dominating one small sector will survive. I mean, that’s also been the story of how the FANG became who they are now. It’s the classic 'Zero to One' way of looking at businesses
A view on capital allocation and how some tech CEO/Founders who hit a point of massive FCF generation are not well prepared to allocate that because their skillset may not be in capital allocation and they may not be developing that skillset. It’s the view that Founders/CEOs add much value in the growth phase where you are building a good to great company… but what about after? Some will be amazing but some need to hire the right people to achieve that function if they want to lead the company. That’s something to watch for. Some people are just great capital allocators like WEB, Bruce Flatt, Mark Leonard.
2020-04-24
Learning about Ian Cassel’s investing journey where he evolved from investing in stories to momentum investing to mining companies to GARP to who is now.
Learning about his experience from a $50K investment go to $1.1M to $0. Such an amazing perspective that excites me and gives me motivation … and an ability to sit back and think longer term about my approach to investing as well, instead of feeling the pressure to become top notch immediately because all I’m doing is studying great investors.
Another revelation is that I don’t think there are many investors who share their early development and journey as often.. we mainly focus on what people do now.. but I feel like the development of investors would be extremely important as well…
Cool to hear about his view on expanding diversification from 8 to possibly 15 companies. It’s something I’ve been rethinking lately with the bear market as there are so many opportunities.
It’s also refreshing to hear his POV on buying distressed and hated companies at the bottom of a bear market… yes, statistically they will make you a lot of money.. but you really need to know what you are doing and it can be closer to gambling than investing..
https://www.youtube.com/watch?v=urkBe_kUSyI&feature=emb_logo