Phil Ordway from Anabalic LLC has made a great presentation on capital allocation. In everyday parlance, capital allocation is “how you use cash”. Everything involves tradeoffs based on opportunity cost and how you evaluate these tradeoffs is essential.
For those who read the excellent book The Outsiders (read it if you did not), you will enjoy Phil’s presentation. The presentation goes a beyond effective capital allocation. It address three things companies need to do that everybody would agree on.
Effective Capital Allocation
Meaningful communications with stakeholders
Point #2, “good” shareholders, is interesting and definitely not talked about enough. I’m glad Phil brought it up and should be the subject of further studies. Just having the “right” shareholders can make a significant difference. Think of the effect of having Warren Buffett as a shareholder did for Graham Holdings (The Washington Post). Point #3, meaningful communications with stakeholders, is not done properly. Most companies have some kind of Investor Relation “IR” department but don’t communicate properly.
This presentation is for investors, board members, executives, and anybody that runs a company.
Here’s a bonus presentation from William Thorndike, author of The Outsiders”.
Here’s a great video by Joel Greenblatt, author of You Can Be a Stock Market Genius, with less than 3,000 views. In a segment, he talks about how outside influence, or “group think” affects our judgment, and basically on how we price stocks.
“We try to stick to companies gushing free cashflow. Huge returns on capital, meaning they deploy their capital well.
That avoids some of the value traps from ‘traditional’ value. I think that brings up the point – we don’t really think of value as low price-to-book, low price-to-sales investing. We’re actually valuing businesses based on cashflow, like a private equity investor would.
So if you’re trying to figure out what a company’s worth and buy it for less, at a bigger discount, that will never go out of favor even if value as defined by companies like Morningstar, which is low price-to-book or low price-to-sales investing. That may or may not stay in vogue. It may be out of favor sometimes, in favor, it may not even outperform the market going forward.
That doesn’t mean that much to me because those have been correlations that have worked with more than your fair share of companies that are out of favor. I imagine they’ll come back a some point. We’re actually valuing businesses based on cashflows. That’s what stocks are, ownership shares in businesses.”
Yesterday Apple announced new iPhone models that will be bigger, will be better, faster, stronger, and—of course—more expensive. Over the summer Apple (AAPL) passed the $1 trillion in market cap value milestone. Amazon (AMZN) followed not too long after. Today one share of Apple cost $224, up 32% just in 2018.
If there’s one stock that analysts couldn’t get right, it’s Apple. Not because they are not smart. It’s the opposite, most analysts are very brilliant. The problem is that analysts are stuck playing the short-term quarter to quarter game of guessing how many iPhones Apple will sell. Apple has over 100 analysts following the company. At this moment last year, when the iPhone X was announced, analysts were saying the cost of the iPhone was too high and sales would slow down, and the stock would fall. Following Q2-2018 results, analysts changed their tune when Apple blew the estimates out of the water. Analysts are now saying that because the iPhone X was selling so well it would eat into future revenues. Analysts insights are interesting, but if you are a retail investor, I suggest to do your own homework and invest with a long-term horizon. And ignore the short-term noise.
How did we get to $1 trillion? The Ringer made this interesting 7 min long video.
A year and a half ago I wrote this article on Seeking Alpha. Apple was trading at $106 a share. Apple was a 205-bagger from 1990 to March 2016, without calculating dividends. But it wasn’t an easy ride. You needed an 80% loss twice in order to get it and the large majority of the gains came after the iPhone was released in 2007. This is not your classic buy and hold fairy tale. Below are a couple tables and charts that display Apple’s rocky ride to $1 trillion.
The first table summarized Apple’s stock price since the IPO in the early 80s. It wasn’t necessary a good time to buy and Apple was on survival mode for over the next decade. The stock hover around $0.50 to $2 for the large part of its existence.
This second chart shows that the multi-bagger gains came after 2007, when the iPhone was released.
Below is a 10-year chart of Apple financials. Look at the revenue growth, going from $37 billion to $229 billion at the end of fiscal 2017. And it is still growing….
Bruce Flatt, the CEO of Brookfield Asset Managmement (BAM), has made a rare appearance at Google for one of their Talks (video below). The most striking thing about the presentation is the lack of people that showed up to listen to one of the world’s most successful investors. In the screenshot below of the presentation, I count 10 people. Let’s say there were 15 people. If they paid any attention, these 15 people are now much better investors. I’m not sure how something like this happens. I can see 10 people showing at a talk in the basement of a church, but this is Google we are talking about, and Google is located in Silicon Valley with all that money and investors. My guess is that nobody knows who Bruce Flatt is.
The lack of people is a testimony to the low profile of Bruce Flatt and Brookfield Asset Management. Unless you are in the investment world, most people have no idea that they own some of the world’s most precious real estate with with $285 billion in assets.
I have written an elaborate article on BAM in the past (read here) and it was also the subject of a podcast I did (listen here). Here is the video:
Greenblatt discusses active versus passive investing and some of the reasons why he still believes active investing is the better option saying:
“I was asked to give a speech at Google last year and I started it this way… I said even Warren Buffett says that most people are better off just indexing and I said I agree with him… I didn’t stop my lecture there. I said… but then again Warren Buffett doesn’t index and neither do I don’t… how come? It’s because the opportunity is there if you know how to value businesses. Which most people do not… To take advantage of the fact that the market is emotional over the short term… often!