What weighs more? - Evolution of a value investor (Part 2)

In a legendary scene in Money Heist. Main character “Professor” sits and ponders while his brother is doing his marriage dance with the bride. He ask himself - What weighs more? Love or Death?

In line with difficult questions, here are 3 perplexing questions to ask as an investor.

Q1. What weighs more, earnings today or earnings in the future?

• Do you understand a business down to its segments and what drives its CEO to do what they do?
• Take the example of Amazon. For years they reported no profit and the stock remain volatile. But true believers could see what Jeff Bezos was doing. In fact, a video by Masayoshi Son said it best. Jeff was a long term visionary, he never said profits will come in the short run, the losses his company made were not actually losses, he just kept reinvesting in building a company that grew its footprint in terms of market share, wallet share and mind share. These were the expenses of R&D, marketing and acquisitions that would have not turned up on the balance sheet at all. 

Answer: Large durable earnings in the long run matter most. 

Q2. What weighs more, cashflow or profits?

• Do you know a profitable company that went bust? What went wrong? Any of the following: “Fraud, mismanagement, aggressive growth etc.”
• But the one thing that is often true is the inability to generate cashflow. In this case the operating cashflow. Cash is the oxygen to the business and it is absolutely necessary for survival. 
• Businesses have a tendency to extend credit terms to their customers to grow their business - recording this as sales and profit. But the fact is that the only day that profits should be truly recognise is when cash is collected often seen as positive operating cash flow. After all, cashflow is harder to fudge than earnings.
• So the best way would be as Henry Singleton of Teledyne (as written in the book The Outsiders) - using the Teledyne return = Average of Net Income and Cash Flow of each business segment. And this is a metric that all managers should focus on.

Answer: Why choose? Take the average to get the best of both worlds.

Q3. What weighs more - making money or making the world a better place? (i.e Does a business spark joy?)

• This is a personal question - The Motley fool said it right Make your portfolio represent “your best vision of the future” 
• Companies that make the world a better place deserve to be in your portfolio. Another way to see this is the snap test like Thanos in The avengers. If a company is snapped out of existence today - would you notice? Would you miss it?
• A better future is debatable but it could be like this - the future could be clean and green. The future could be electric cars, extremely efficient transportation, 0 pandemics, cure for cancer, gaming as a career, entertainment of high quality at an affordable price, quality healthcare, 0 people dying from starvation and malnutrition and so on. The list goes on...

Answer: A business that sparks joy for the majority of society. One that does well by doing good will be a winner in the long run.

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The answer to the professor’s question at the beginning is neither Love nor Death. But life. 

Life weighs most. 

Because we live in the now and plan for the future. The future is unknown but we remain prepared for unknowns of life by being mentally and financially secure in the present.

Save like a pessimist, invest like an optimist. 

With the above 3 questions as a framework - You will do well. I am sure of that.

Till next time. Invest well.