Whitney Tilson Talks at Google [SLIDES] + Checklist

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Here’s and excerpt from the Google talk where Whitney Tilson discusses his four steps that he looks at when looking at a potential business to invest in (emphasis added):

WHITNEY TILSON: Well, I use a four-step—I actually have it taped to the wall next to my desk. My four-step process is first, when I look at any new stock is circle of competence. Do I know something about this industry? Is it knowable? Is the future predictable here? It’s almost like a yes or no thing. There is some gray area where maybe I don’t know it very well, but I think I can do some research and get some. So circle of competence. Then it’s: Do I like the company? And I look at financial characteristics, cash flows, return on equity, et cetera. So I evaluate the company. And by the way, I’ll invest in sort of crummy companies if it’s cheap enough. But ideally I’m looking for higher quality businesses that I can compound over time. Then I look at the industry, because a good company in a crummy industry, is going to struggle. So it’s a company and industry analysis, then management. And that’s really important. Both, do they run the business well? Do they allocate capital well? And do they treat shareholders well? And here’s the thing. I can find, right now I can find hundreds of companies that I understand really well, great industry and company dynamics, wonderful management, treats shareholders great. So what’s the problem? The stock’s not cheap. Everybody else on earth can understand it and likes the company and the industry and the management, and therefore, the stock price reflects it. The real key is to then just sit there and sit there and sit there and sit there and be super patient until I can find a situation where the stock price is well below what I think it should be, based on my analysis. And usually what that requires is for there to be some—the market thinks one thing, the variant perception that John talked about. To make money investing you only need to do two things. You need to bet against the crowd—that’s the easy part. And then you just have to be right. That’s the hard part. (Source: Talks at Google)

TILSON’S CHECKLIST

  1. Circle of competence
    1. Do I know something about this industry?
    2. Is it knowable?
    3. Is the future predictable here?
  2. Company & Industry Analysis 
    1. Do I like the company?
    2. Financial characteristics, cash flows, return on equity, et cetera?
    3. Higher quality business able to compound over time?
    4. Good or a bad industry?
  3. Management
    1. Do they run the business well?
    2. Do they allocate capital well?
    3. Do they treat shareholders well?
  4. Price
    1. Is the stock cheap?

Click image below for full PDF of slides from Tilson’s Google talk.

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Tilson on Google (emphasis added):

And when you think about Google, by the way, if Google were to separate itself out and spin off Google Fiber and the self-driving car stuff, like Google is—a lot of those expenses are investing in things that are currently not generating any revenue. It’s just straight out losses. Like if you actually, I think a reasonable way to think about Google would be to sort of take out all the money losing stuff where—these pie in the sky thing—where Google actually has a pretty darn good track record of developing really valuable things down the road. And I might give Google credit for that, and say, how much is their core business really earning, x-ing out all these expenses. And it might be quite a bit of expenses, and you might actually say Google’s core business trading for 15 times earnings or something like a market multiple, and then you’re getting a free call option on stuff that—self-driving cars. If you guys nail that, that could change the world. That’s a worldwide game changer, and you guys will own it. I’m not sure I’d give Microsoft much credit for that. They have a horrible track record of just pissing money away over the years, and projects and acquisitions that just create no value. And Microsoft shareholders are sort of rebelling. But you guys seem to be a lot better at that. So again, that would be the argument for owning Google stock is that it’s really not as expensive as it appears because they’re expensing a lot of their expenses, their core business is even much more profitable than it appears. One of the world’s greatest businesses. And then they’re investing in a lot of new stuff where their’s likelihood to pay off. (Source: Talks at Google) 

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The Theory of Investment Value (Part 1)

A New Book that is Old: The Theory of Investment Value, Written by John Burr Williams

Today I received a book, that I ordered a few days ago, delivered to my front door by the postman. The book was John Burr Williams’ The Theory of Investment Value from 1938.

I have just read a few pages today, but already noted a few interesting things. In the beginning of the book Williams writes about price and value, and also about speculation and investment. Two familiar topics that Benjamin Graham also discussed, for example in his book The Intelligent Investor.

Quotes

Below are two quotations, the first one about real worth and market price and the second about the definition of an investor. Boldings are my own.

“Separate and distinct things not to be confused, as every thoughtful investor knows, are real worth and market price. […] Our problem, therefore is twofold: to explain the price as it is, and to show what price would be right.”

“As will be shown later, the longer a buyer holds a stock or bond, the more important are the dividends or coupons while he owns it and the less important is the price when he sells it. In the extreme case where the security is held by the same family for generations, a practice by no means uncommon, the selling price in the end is a minor matter. For this reason, we shall define an investor as a buyer interested in dividends, or coupons and principal, and a speculator as a buyer interested in the resale price. Thus the usual buyer is a hybrid, being partly investor and partly speculator. Clearly the pure investor must hold his security for long periods, while the pure speculator must sell promptly, if each is to get what he seeks.”