The launch of the iPhone X has inspired me to re-launch the definition of a value company.
Like many product launches I am still working on the definition whilst I distract you with some hype.
Why bother? I consider myself a value investor.
Unfortunately my best ideas are looking like someone else’s happy hunting ground.
Rather than define a value company I have listed a number of virtues of a value company.
- Defensible earnings
- Stable operating environment
- History of profits
- Leading product or service in a mature sector.
- Dividend yield/share buybacks – throwing off excess cash
Meanwhile, over in the private markets, entrepreneurs and capital are using the above as a checklist of destruction.
Why cannibalise your fast growing peers when there are slow moving elephants to had?
I will only list four examples so we don’t get too down-hearted.
- Ride sharing
- House sharing
- Online migration to bricks and mortar
- Self driving technology
Great value managers of the past have been able to avoid sunset business.
So what is the difference between a value company and a sunset company?
A value company is a sitting duck.
Gary Larson knew this day was coming.
However it is not just the penguins that need to be nervous. Apple started to act like a value company and at one point had a value P/E multiple.
iTunes was trading in a stable operating environment and got picked off by Netflix and Spotify. Approximately US$93 billion in market cap or 11% of AAPL’s current market cap ripped out from under their nose.
So What is My Call to Action?
Value managers are operating in a shrinking investment universe.
Today’s margin of safety is tomorrow’s unicorn.
For a value manager to survive we must study the venture capital market with the same diligence we apply to a potential investment.
Invest where the VC money is not!
It’s easy to answer no, of course not. Valuation has to matter. Investing with a margin of safety has to protect you against a permanent loss of capital. And that value investing has to be painful because that’s what creates the opportunity in the first-place.
All true. But these concepts don’t exist in a vacuum. They exist in a dynamic market. Which is why it’s important to ask the tough questions. I’ve learned a lot from Mark’s questioning whether or not common investment assumptions still hold.
Each post has challenged a long cherished idea. And that’s a good thing. Charlie Munger explains why.
The ability to destroy your ideas rapidly instead of slowly when the occasion is right is one of the most valuable things. You have to work hard on it. Ask yourself what are the arguments on the other side. It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.
It can be uncomfortable. But we have no choice. Investors have to be able to work with uncertainty.