Tren Griffin @trengriffin I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. I am on the board of directors of Kymeta. Nov. 02, 2019 2 min read

1/ "Competitive advantage period (CAP) is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital." "Competitive forces will drive returns down to the cost of capital over time" Mauboussin 

2/ "CAPs are set at the margin … if an implied CAP is “too short” (too long) for the shares of a given company, astute investors will purchase (sell) those shares in an attempt to generate excess returns. CAPs are rarely static, and are usually expanding or shrinking..." MM

3/ "CAP attempts to capture the period a company can invest at returns in excess of the cost of capital. The terminal value is calculated with a residual technique (NOPAT/ WACC). With that set, stretch the number of years of assumed value creation to match the stock price." MM

4/ "Each year of value-creating cash flow is like a pancake in a stack. By definition, beyond the terminal value, there is no value creation (although there is value). So CAP essentially stacks as many pancakes as necessary to reach today’s stock price.” Michael Mauboussin

5/ Three components: 1) a prestrategy or steady state value— the worth of a company if no value is created; 2) value created by the company’s pursued strategy, represented by the shaded area; and 3) terminal value, which often, but not always, assumes no further value creation.

6/ “The terminal value is where the “CAP” line intersects the X axis….

It is not unusual for 75% or more of a company’s value to be attributable to a terminal value.” Michael Mauboussin

P.s., Aswath Damodaran 

7/ The durability of a moat will determine whether that terminal value/CAP expected by the market makes sense. An investor should make an over-under judgment about CAP durability rather than trying to make a precise calculation of the CAP.

Approximately right > precisely wrong!

8/ "Buffett buys businesses with 'high returns on capital’ (returns in excess of the cost of capital) that have ‘deep and wide moats’ (sustainable CAPs) and holds them ‘forever’ (hoping that the CAPs stay constant). Finding businesses with enduring CAPs is not simple." Mauboussin

9/ "We’re trying to buy businesses with sustainable competitive advantages. The problem is that they have high prices. If all you needed to do is to figure out what company is better than others, everyone would make a lot of money. But that is not the case.” Charlie Munger

10/ Represented graphically, competitive advantage period (CAP) is the duration of excess returns. In other words, how long a company can earn returns in excess of the opportunity cost of capital is the competitive advantage period. 

11/“The time that an average company can sustain excess returns is shrinking.... This reduction in the period of sustained value creation reflects the greater pace of innovation brought about in part by increased access to, and utilization of, information technology.” Mauboussin

You can follow @trengriffin.


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