When you get chance to chat to renowned author and researcher Michael Mauboussin you take notes!
1. Expectations investing
1.Given today’s price, what are the expectations of important value drivers that gives today’s price.
“how high is the bar set”?
2. Analysis to assess whether will meet, exceed, or fall short of expectations
“how high can the jumper jump”?
3. And so do we want to buy sell or hold
“will the attempt be successful or unsuccessful”?
2. Multiple is not valuation
Using a PE is a shorthand for the full valuation process
(shorthands help because they save time but … )
Embeds hidden assumptions, biases and blindspots
Don’t use the proxy without understanding foundations
Best practice is to go back to first principles
“you need to earn the right to use a multiple”
further reading: What does a price-earnings multiple mean?
3. Everything’s a DCF
Discounted cashflow is your valuation approach for everything
Lots of assumptions, but a few drivers of value really matter:
- Sales growth
- Free cashflow generation
- Return on capital employed
- Cost of capital
But also … valuation is about strategy, you need to understand the right fundamental unit of analysis
Further reading: Everything is a DCF Model
4. Market efficiency
Getting information is not costless and arbitrageurs don’t always show up.
>> Markets may be “efficiently inefficient”
BAIT framework: who is on the “other side” + whether there’s a return opportunity:
Behavioural (they are acting on a behavioural bias that is not rational)
Analytical (you have better analytics)
Informational (you have better information)
Technical (they are effectively forced buying/selling)
The economy has flipped around – from 1/3 of investment being intangibles to 2/3 over the last 50 years
Accounting systems are designed around a tangible economy. If you are viewing things as “profitable” or “unprofitable” you’re missing something big
further reading: Intangibles and earnings
6. “Unprofitable” companies
Three types of company:
1.Profitable on standard accounting metrics
2.“Good losses” – investing in intangibles on top of great unit economics
3.“Bad losses” – negative unit economics
> 2 shows highest shareholder returns last 2 decades
One thing to take away:
Nothing is immutable in investing, be actively open minded and curious
Most underappreciated thing
Temperament is more important than smarts