Using Cash Flows and Moats to Evaluate Investments

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.

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.

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

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.

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."

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.