Very nice article Gary and thank you for sharing. I think there is one statement in there that might benefit from some qualification.
"However, if that leader translates their greatness into enduring business characteristics, then the competitive advantage can become permanent (e.g. Steve Jobs and Apple)"
The 'if' here should come with a health warning. Jack Welch and GE looked like a great bet at the time of Jack's retirement. He seemed to have GE all set up to weather any storms. He himself was very confident in their success as he retired and, although the market was still suffering the .com slide, the general consensus was that GE would continue to be a good long-term investment. As it turns out, the moats were ephemeral and the succession plan was a disaster.
Even with the benefit of a seat at the boardroom table, reliably predicting how a business will fare following the replacement of a charismatic and strong leader seems doomed to failure.
Iger and Walt Disney Company has a similar ring to it, though we're on a new chapter there.
Great Comment. The lesser I feel one's comepetence, the more they should look for higher Margin of safety and diversify more. Often, we think we understand all the drivers impacting a business, only to find out we were blindsided.
Gary- let’s say you own a business which is a 100% ROIC business, durable moats, growing at 6-8% per year, good management team- doesn’t hoard cash, pays out dividends, no debt. (Close example: Crisil India - largest credit rating agency in India)
Let’s say it trades at 50x earnings. Is there a price you’d consider selling it at? How would you do the math?
There is always a price at which something is overvalued. The challenge is that we don't know the future with anything close to certainty. In your question, the 6%-8% is just an assumption or perhaps the current/recent rate of growth. Depending on what you assume about that into the distance future you going to get vastly different valuations.
Almost any valuation can be mathematically justified. It's just that the higher you go the less likely you are to be right. Putting it differently: they higher the valuation, the more you are betting against the base rate probabilities. My own style is to not bet that I am good enough to forecast extremely high growth into the distant future as that doesn't feel like enough margin of safety.
Very nice article Gary and thank you for sharing. I think there is one statement in there that might benefit from some qualification.
"However, if that leader translates their greatness into enduring business characteristics, then the competitive advantage can become permanent (e.g. Steve Jobs and Apple)"
The 'if' here should come with a health warning. Jack Welch and GE looked like a great bet at the time of Jack's retirement. He seemed to have GE all set up to weather any storms. He himself was very confident in their success as he retired and, although the market was still suffering the .com slide, the general consensus was that GE would continue to be a good long-term investment. As it turns out, the moats were ephemeral and the succession plan was a disaster.
Even with the benefit of a seat at the boardroom table, reliably predicting how a business will fare following the replacement of a charismatic and strong leader seems doomed to failure.
Iger and Walt Disney Company has a similar ring to it, though we're on a new chapter there.
Great Comment. The lesser I feel one's comepetence, the more they should look for higher Margin of safety and diversify more. Often, we think we understand all the drivers impacting a business, only to find out we were blindsided.
Gary- let’s say you own a business which is a 100% ROIC business, durable moats, growing at 6-8% per year, good management team- doesn’t hoard cash, pays out dividends, no debt. (Close example: Crisil India - largest credit rating agency in India)
Let’s say it trades at 50x earnings. Is there a price you’d consider selling it at? How would you do the math?
There is always a price at which something is overvalued. The challenge is that we don't know the future with anything close to certainty. In your question, the 6%-8% is just an assumption or perhaps the current/recent rate of growth. Depending on what you assume about that into the distance future you going to get vastly different valuations.
Almost any valuation can be mathematically justified. It's just that the higher you go the less likely you are to be right. Putting it differently: they higher the valuation, the more you are betting against the base rate probabilities. My own style is to not bet that I am good enough to forecast extremely high growth into the distant future as that doesn't feel like enough margin of safety.
Great piece. Thanks for putting it out there for us!