Scaled Economics Shared

Just finished a Greenwald piece on local strategy in HBR and he details how the two best advantages a business can have are customer captivity and scaled economics shared. Another way of saying it would be scaled economics shared. A bit nicer way to put the network effect/switching cost with scale. Strategy is how to respond to competition and what separates one from its competition with barriers to entry. I prefer to think of it as choices of what not to do as a way of inverting. https://archive.is/53ru5#selection-1585.577-1585.970

Just a Little Bit

Margins are very thin and not just with it being the Bezo's opportunity. In the 8 years from the start of 2017 to the end of 2024, the SPX compounded at 14.85% leading to 1 dollar becoming 3.03 dollars. The SPX is now down 13.54% after Liberation day and if you take away that performance from the previous 8 years, you will be left with 2.62 for a CAGR of 12.79% return. Nearly 2 percent of performance a year for 8 years wiped away. You still have to build that lead for the inevitable downswings at times. SPX had 5 days of >5% loss in 2008 and 2020. We have one this year, but Thursday was a 4.8%. All arbitrary, but inside the human minds, there are certain hurdles that mark milestones. Larry Fink claims in his annual letter that in a 30 year, the average pension outperforms a 401k by 0.5%. Compounded over 30 years, you will get returns of 17.45x instead of 19.99x assumming a 10% vs. 10.50% rate leading to 14.5% less in the retirement fund or 9 years of retirement. Charlie Munger always illustrated with 15% compounding for 30 years and paying 35% tax once or 15% each year and taxed 35% before investing again. It's the difference of 13.3% vs 9.75% return and over 30 years, what 3.5% does is a lot. Little things. On the Margin. A little late or a little slow.

Bounded Rationality

Sometimes it is better to just make a decision with just as much information as you have. From Bezo's 2016 shareholder letter:

Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.

It is prudent to be patient, but a small starter position to learn more about a company is not the end of the world. Break problems down into managemable chunks and move fast and break things like Tech likes to live by.

Compounding and Consistency

It is amazing how much can be gained from preserverance and consistency as it compounds with time. Never unnecessarily interrupt compounding and just one step at a time and it will pile up.

Patterns

Munger's 3 ideas for fishing: spinoffs, 13fs, andshare cannibals Huber's three sources of returns 1. Revenue Increase Consolidation in industry leading to rational supply. This happened to semi-conductors as I once viewed it as simply too cyclical and a commodity. Pricing Power 2. Capital Allocation Asset-light Share buybacks leading to cannibalization 3. Rerating of Multiples Story stock Sentiment 3 Types of Investments: Stable, recurring cash-flowing companies that have high ROIC; turnarounds that may seldom turn around, and cyclicals. Invariant perception is what is the market missing and what I think about the value. It has to be bridged. I can be good at identifying it, but luck will be the arbiter in the short-term until the thesis plays out.

Heuristics

Is P/E a good short-cut? It measures the price of a stock as compared to its earnings, but it the metric could be very flawed. It measures the past year's earnings and there could be a lot of cyclicality in the industry so a low P/E is buying at the peak of the cycle. What has been true in the past will not necessarily be true in the future. And GAAP earnings is not cash flow. Is cashflow a better measure? It's better, but not perfect. What is the duration of the cashflow. What is the quality of the cash flow. How is the cashflow allocated. Is Return on Capital or its subsets of Return on Invested Capital or Return on Incremental Invested Captial a better measure? The returns should all trend towards that in the long-run, but it's more important to understand the why. Why are all these measures a good heuristic. They also don't exist in a vacuum and it has to be compared against opportunity cost and its risks taken. Rules are the guidance for the wise and the obediecne of the fool.

Profitable Companies and Where to Look

I am not sure what industries I want to concentrate on fishing as I am a generalist and still learning. The top profitable companies shown above are energy, technology, finance, healthcare, auto, retail, telecoms, and household products. The map is not the territory. That is just one year and gives no thought to the capital employed to achieve those profits and like Malone says:

“It’s not about earnings, it’s about wealth creation and levered cash-flow growth. Tell them you don’t care about earnings..” “The first thing you do is make sure you have enough juice to survive and you don’t have any credit issues that are going to bite you in the near term, and that you’ve thought about how you manage your way through those issues.” “I used to go to shareholder meetings and someone would ask about earnings, and I’d say, ‘I think you’re in the wrong meeting.’ That’s the wrong metric. In fact, in the cable industry, if you start generating earnings that means you’ve stopped growing and the government is now participating in what otherwise should be your growth metric.”

Like Malone, the masters that have influenced me most are Buffett and Munger, Lynch, Greenblatt, Pabrai, Berkowitz, Schloss, Bill Miller, Einhorn, Ackman, Klarman, Burry, Prem Watsa, Francis Chou, Li Liu, Zell, Howard Marks, Rochon, Chuck Akre, Tom Gayner, Nick Sleep and Qais Zakaria, Spier, Terry Smith. I will do well to reread and contemplate their ideas. And always there are many more beyond what I know and want to know. The things I don't know that I don't know.