Using Cash Flows and Moats to Evaluate Investments

1. AMAndrew Marks0:00

   If you're an investor, you have to have a couple of different skills. One is you have to think about the future potential of the company, and the second thing is you have to think about, well, what's that worth versus what is that selling for? And if you come back to the fundamental ideas of the memo, one of them is that all investments in equities are worth the discounted value of their future cash flows from here to eternity. And for some companies, those cash flows are more in the here and now, and for some companies, those cash flows are very far away. But they all go into the formula. And by the way, if you think about the nature of a DCF formula, every company requires judgments about the future. It can be a seemingly stalwart company that has immense consistency and whatever, but, you know, those can, can be disrupted.

2. HMHoward Marks0:52

   Well, I think the greatest example, one of the industries that all the value people thought were impregnable, great moats, you know, was, was the newspapers. Because you had your newspaper, you didn't have to worry about competition from the newspaper in the town next door. You were entrenched. It only cost fifteen cents, so nobody would stop buying it in tough times.

3. AMAndrew Marks1:13

   And if you wanted to advertise, you wanted to advertise in the paper with the most circulation.

4. HMHoward Marks1:17

   And the local movies had to be in the local paper, the local want ads, the local car ads. And the great thing was that if the consumer bought it today, guess what? They had to buy it again tomorrow because it had a, a one-day shelf life. What could be a better business? And, you know, twenty years later, m-most of the companies in that industry are fighting for their lives.

5. SPSpeaker1:36

   If I could just make an observation, you sound like a crazy person when you assert that en masse, very quickly consumer behavior is going to change. If you would have told me when I was reading the paper, and this was the most important thing in America, "Well, newspaper values are mostly gonna go to zero because all of the consumer attention is gonna be shifting to consuming everything on their computers in an interconnected web of servers that doesn't really exist yet. So therefore, the newspapers won't have value." You'd be like, "What?" Or if you came to me ten years ago and said, "Facebook bought Instagram, and they're demonstrating their ability to constantly keep all the consumer attention. But eventually, actually, this Chinese company is gonna start, and it's gonna be short form v-- yeah, Facebook won't figure it out this time. And so all the consumer attention's gonna shift." And, and I'd just be like, "You're wrong. I just don't believe you."

6. AMAndrew Marks2:26

   Yeah. Well, I mean, that's, that's of course true, but I think the other thing that's really interesting to note is, is, and there are these very widely circulated charts of the, the speeding up of technological adoption. And so it was very possible for companies to be much, much, much more durable, um, back then than it, than it is today, in, in my opinion. I mean, if you transport yourself back to nineteen fifty and you think about, well, how many businesses are there where, where I think I can say with high conviction that they'll be the same in ten years as they are today? I think that number would probably be much, much higher than you could say today. Without understanding what management is doing to further entrench their moats or, or fend off competition or continuously evolve or whatever, it's very, very hard to say, well, with, with no minding of the ship, this business will just stay consistent. There are very few businesses that idiots can run these days.

7. HMHoward Marks3:20

   But I'll tell you to second what Andrew's saying, if you go back to my youth in the fifties w-when I was a young man in the sixties and seventies, you just didn't have the feeling that the world was changing. My thought model w-- for the world at that time, if, at looking back at it, is kind of a con- a consistent backdrop, like on a stage, and the, and the actors do their thing in front of the backdrop, but the backdrop doesn't change. And so there are cycles, ups and downs, uh, excesses and corrections and, and all these things, but the world didn't change much. And, uh, you know, a comic book was a dime for my whole youth. But today, everything changes every minute.

8. SPSpeaker4:07

   So here's a question then. Should companies be worth less? Because if the future is more uncertain and it's more likely that things get disrupted and moats are less permanent than they've ever been, shouldn't we consider less future years of cash flows?

9. AMAndrew Marks4:26

   Well, like everything, it's a double-edged sword. I mean, on the one hand, you just made the point that without minding the ship, companies are much more potentially disruptable. But on the other hand, that means if you have competitive advantages and you continue to mine those advantages, and you use them to enter adjacent markets or launch new products or going after other markets geographically or whatever, there's much more value creation to be had. And I think the ability to leverage your advantages and build more for the companies that are really doing so has probably never been higher. And by the way, with the internet, you can address global markets. We just talked about newspapers where you couldn't address the town next door.

10. SPSpeaker5:06

    [upbeat music] Who got the truth? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth? Who got the truth now? Hmm

Episode duration: 5:25